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 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 31 percent and 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 $ .30

Stage II 2.10

Stage III 2.70

Stage IV 3.60

b. Assume in Stage IV that an investor owns 330 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?

Answer 1

a.

Particulars Stage    I Stage  II Stage  III Stage IV

Earnigs Per Share 0.30 2.10 2.70 3.60

Payout Ratio 0 % 10 % 31 % 52 %

Dividend Per Share ( Earning Per Share X Payout Ratio) 0 0.21 0.84 1.87

b. Total Shares Owned = 330

Dividend Per Share = 1.87

Total Dividend = 617.10

Tax @ 15 % = 92.56 ( 617.10 X 0.15 )

Investor's after tax Income = $ 524.54

c. Stock dividends or Stock splits are most likely to be utilized during Stage II (growth ) or Stage III ( Expansion )