Question

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 52 percent during the maturity stage (IV).

a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

Stage I	$	0.40
Stage II		1.85
Stage III		2.20
Stage IV		3.50

b. Assume in Stage IV that an investor owns 360 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

• Stage Iunanswered
• Stage IIunanswered
• Stage IIIunanswered
• Stage IV

Answer 1

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Answer:

A. Dividend per Share = Dividend Payout Ratio * Earnings Per Share

Putting the values given to calculate dividend per share we get,

Stages	DPS = Payout Ratio * EPS	DPS
Stage 1	=0.00*$0.40	$0
Stage 2	= 0.13*1.85	$0.2405
Stage 3	=0.37 * $ 2.20	$0.814
Stage 4	= 0.52*$3.50	$1.82

b. Calculation of Investors After Tax Income from Cash Dividend:-

Cash Dividend = Number of Shares * DPS in Stage IV

= 360 * $ 1.82

= $655.2

After Tax Income = DIvidend ( 1 - Tax Rate)

= $ 655.2 ( 1- 0.15)

= $ 556.92

In Stage II and Stage III for Growth & Expansion respectively, the firm is likely to utilise stock dividend or stock split.