Name: Kumail Afsar Zaidi Course: FM

Reg No: 36760 Campus: Main (edc)

Question No. 1
Sales $15,200,000

Operating costs including depreciation $11,900,000

EBIT $3,300,000

EBT $3,000,000

Taxes (40%) $1,200,000

Net Income $1,800,000

(a) The company had a 40% dividend payout ratio in 2008. If Bowles wants to maintain this payout ratio
in 2009, what will be its per-share dividend in 2009?

Dividend payout ratio = Dividend per share / earnings per share

Earnings per share = [Net income / number of shares outstanding]

Earnings per share = [$1,800,000 / 500,000 shares]

Earnings per shares = $3.60

Dividend payout ratio = [Dividend per share / earnings per share]

40% = [Dividend per share / $3.60]

Dividend per share = $3.60 * 0.40

Dividend per share in 2009 = $1.44

{OR}

Dividend payout ratio = [Dividend payment / income]

40% = [Dividend payment / $1,800,000]

Dividend payment = [$1,800,000 * 0.40]

Dividend payment = $720,000

Dividend per share = $720,000 / 500,000 shares

Dividend per share in2009 = $1.44

(b) If the company maintains this 405 payout ratio, what will be the current dividend yield on the
company’s stock?

Current dividend yield = [Annual dividend per share / current stock per share]

Current dividend yield = [$1.44 / $48]

Current dividend yield = $0.03 = 3%

Current dividend yield = 3%

(c) The company reported net income of $1.5 million in 2008. Assume that the number of shares
outstanding has remained constant. What was the company’s per-share dividend in 2008?

Net income reported in 2008 = $1,500,000

Number of shares outstanding in 2008 = 500,000 shares

Dividend payout ratio in 2008 = 40%

Dividend payout ratio in 2008 = [Per share dividend in 2008 / earnings per share in 2008]

40% = [Per share dividend in 2008 / earnings per share in 2008]

Earnings per share in 2008 = [Net income of 2008 / number of shares outstanding in 2008]

Earnings per share in 2008 = [$1,500,000 / 500,000 shares]

Earnings per share in 2008 = $3 per shares

Dividend payout ratio in 2008 = [Per share dividend in 2008 / earnings per share in2008]

40% = [Per share dividend in 2008 / $3]

Per share dividend in 2008 = $3 * 0.40

Per share dividend in 2008 = $1.20

Per share dividend in 2008 = $1.20

(d) As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining
the same per-share dividend in 2009 that it paid in 2008. If it chooses this policy, what will be the
company’s dividend payout ratio in 2009?

Per share dividend paid in 2008 = $1.20

Bowles is considering maintaining the same per share dividend in 2009 that it paid in 2008. So, dividend
per share in 2009 = $1.20

Dividend payout ratio in 2009 = [Dividend per share in 2009 / earnings per share in 2009

Dividend payout ratio in 2009 = [$1.20 / $3.60]

Dividend payout ratio in 2009 = 0.3333 = 33.33%

Dividend payout ratio in 2009 = 33.33%

Question No 2
(a) Under the residual dividend policy, the company uses its retained earnings to fund its projects first
and anything that remains is then distributed as dividends.

Capital budget = $10 million, Capital Structure = Equity (60%) and Debt (40%)

Retained earnings needed = $10 million x 0.60 = $6 million.

(b) Residual dividend = $8 million - $6 million = $2 million

Dividend per share = $2,000,000/ 1,000,000 = $2 per share

Dividend payout ratio = $2 million/ $8 million = 25%

(c) If it pays $3 per share as dividend, then Remaining retained earnings = $8,000,000 - $3 x 1,000,000 =
$5,000,000

(d) No, if the company pays dividend of $3 per share, then it require $5 million to fund its projects.
However, to maintain its capital structure it would require $6 million common stock which would be
made be $1 million fresh issue.
(e) To finance $10 million, the company would finance $5 million from retained earnings remaining after
dividend payout and remaining $5 million by debt issue.

(f) Retained Earnings remaining after dividend payout = $8 million - $3 million = $5 million

Common stock required to maintain capital structure of $10 million (60%) = $6 million

New issue required = $6 million - $5 million = $1 million