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Finance SL5

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01/24/2013

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# Finance

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Sub: Finance Question: Calculation of Projected Dividends

Topic: Dividend Policy

(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid \$1.00 per share in dividends last year. It will earn at least \$8.00 per share 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

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Sub: Finance Solution :

Topic: Dividend Policy

As per the equation 18.1, DPS₁ - DPS₀ = ADJ [ POR (EPS₁) -DPS₀] where, DPS₁ = Dividend per share next year DPS₀ = Current dividend per share ADJ = Adjustment Factor POR = Payout ratio 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 = ADJ = POR = EPS₁ = EPS₂ = EPS₃ = EPS₄ = \$ 0.74 0.25 \$ \$ \$ \$ 8.00 8.00 8.00 8.00 1.00

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Sub: Finance
Using he above formula, DPS₁ = ADJ [ POR (EPS₁) -DPS₀]+DPSⁿ₀) so, DPS₁ = 0.74[0.25(8)-1]+1 = DPS₂ = ADJ [ POR (EPS₂) -DPS₁]+DPS₁) DPS₂ = 0.74[0.25(8)-1.74]+1.74= \$ 1.93 \$ 1.74

Topic: Dividend Policy

DPS₃ = ADJ [ POR (EPS₃) -DPS₂]+DPS₂) DPS₃ = 0.74[0.25(8)-1.93]+1.93 = \$ 1.98

DPS ₄= ADJ [ POR (EPS₄) -DPS₃]+DPS₃ DPS₄ = 0.74[0.25(8)-1.98]+1.98 = \$ 2.00

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Sub: Finance

Topic: Dividend Policy

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