The Sharpe Co. just paid a dividend of $1.95 per share of stock. Its target payout...
The Sharpe Co. just paid a dividend of $1.95 per share of stock. Its target payout ratio is 50 percent. The company expects to have an earnings per share of $4.90 one year from now. a. If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Dividend $ b. If the adjustment rate is .6 instead, what is the dividend one year from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Dividend $ c. Which adjustment rate is more conservative? .3 .6
Homework Answers
Dividend next year = current dividend + adjustment rate * (payout ratio * EPS - current dividend)
a)
D1 = 1.95 + 0.3 * (0.5*4.9 - 1.95)
= 1.953
= 2.1
b)
D1 = 1.95 + 0.6 * (0.5*4.9 - 1.95)
= 2.25
= 1.96
c)
Hence adjustment rate of 0.3 is more conservative
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