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Finance SL5

# Finance SL5

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01/24/2013

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Finance
LEARN TO EXCEL
Homework Help
Step-by-Step Solutions
Experienced TutorsDetailed Explanationwww.classof1.com/homework-help/financeToll Free: 1-877-252-7763

Sub: Finance Topic: Dividend Policy
*
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
www.classof1.com/homework-help/finance
Question:Calculation of Projected Dividends
has begun paying cash dividends. The firm’s chief financial officer w
ould like the firm to distribute 25%of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share atthe rate ADJ = 0.75. Regional paid \$1.00 per share in dividends last year. It will earn at least \$8.00 pershare this year and each year in the foreseeable future. Use the dividend adjustment model, Equation(18.1), to calculate projected dividends per share for this year and the next four.Equation 18.1

Sub: Finance Topic: Dividend Policy
*
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not forsubmitting the same in lieu of their academic submissions for grades.
www.classof1.com/homework-help/finance
Solution :

As per the equation 18.1,
DPS₁
-

POR (EPS₁)
-
DPS₀]

where, DPS₁ = Dividend per share next year

DPS₀ = Current dividend per share
EPS₁ = Earnings per share next year

EPS₀ = Current EPS
So, DPSn -DPS(n-1) = ADJ [ POR (EPS n) -DPS(n-1)]
Or, DPS n = ADJ [ POR (EPS n) -DPS(n-1)]+DPS(n-1)
Given,
DPS₀ =
\$ 1.00ADJ = 0.74POR = 0.25
EPS₁ =
\$ 8.00
EPS₂ =
\$ 8.00
EPS₃ =
\$ 8.00
EPS₄ =
\$ 8.00