Dividends Bowles Sporting Inc. is prepared to report the following 2014 income s
ID: 2717470 • Letter: D
Question
Dividends Bowles Sporting Inc. is prepared to report the following 2014 income statement (shown in thousands of dollars). Sales $12,900 Operating costs including depreciation 9,159 EBIT $3,741 Interest 396 EBT $3,345 Taxes (40%) 1,338 Net income $2,007 Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 470,000 shares of stock outstanding, and its stock trades at $43 per share. a.The company had a 40% dividend payout ratio in 2013. If Bowles wants to maintain this payout ratio in 2014, what will be its per-share dividend in 2014? Round your answer to the nearest cent. $ b.If the company maintains this 40% 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 $1.9 million in 2013. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2013? 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 2014 that it paid in 2013. If it chooses this policy, what will be the company's dividend payout ratio in 2014? 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? 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. -Select-III
Explanation / Answer
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 the profit retention will be more in this way
Bowels Sporting Inc Year 2014 Amt '000 $ Net sales 12,900 Opearing cost 9,159 EBIT 3,741 Interest 396 EBT 3,345 Taxes @40% 1,338 Net Income 2,007 Outstanding shares 470,000 nos Stock value /share = $ 43.00 2013 dividend payut raio 40% Dividend payment @ 40% 2014 803 a Per share dividend=803/470000 $ 1.71 b Current dividend yield /share= 1.71/43= 3.97% Amt in $ 2013 net Income 1,900,000 Outstanding shares 470,000 nos Dividend payout @40% 760,000 Dividend per share $ 1.62 If per share dividend is $1.62 in2014 ,then Dividend payment = 760,000 Dividend payout ratio in 2014= 37.87% ISince 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 the profit retention will be more in this way