Dividends Bowles Sporting Inc. is prepared to report the following 2012 income s
ID: 2655658 • Letter: D
Question
Dividends
Bowles Sporting Inc. is prepared to report the following 2012 income statement (shown in thousands of dollars).
Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 350,000 shares of stock outstanding, and its stock trades at $54 per share.
A. The company had a 60% dividend payout ratio in 2011. If Bowles wants to maintain this payout ratio in 2012, what will be its per-share dividend in 2012? Round your answer to the nearest cent.
$ _____
B. If the company maintains this 60% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places.
_____%
C. The company reported net income of $1.25 million in 2011. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2011? Round your answer to the nearest cent.
$ _____
D. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2012 that it paid in 2011. If it chooses this policy, what will be the company's dividend payout ratio in 2012? Round your answer to two decimal places.
% _____
E. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? Selct I or II below.
I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend.
II. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain a constant dividend payout ratio.
Sales $10,900 Operating costs including depreciation 7,957 EBIT $2,943 Interest 363 EBT $2,580 Taxes (40%) 1,032 Net income $1,548Explanation / Answer
Solution:
a.
b.
c.
d.
Net Income as per Income statement after tax
( $ )
e.
The best solution is -
I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend as this would help company to retain most of its earnings, rather than in case of constant payout ratio, which will retain only 40 % instead of 52 % as in alternative 1
Net Income as per Income statement after tax ( $ ) 1,548,000 Shares Outstanding 350,000 Earning per share $ = Net Income as per Income statement after tax / Shares Outstanding 4.42 Dividend Payout Ratio 60% Dividend per share ( $ ) 2.65