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 18 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 33 percent and will eventually reach 60 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	$	0.30
Stage II		1.80
Stage III		2.40
Stage IV		3.20

b. Assume in Stage IV that an investor owns 275 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.
Calculate dividend per share under each stage as shown below
Dividend per share	EPS*Payout ratio
Stage I	0.30*0%
Stage I	0
Stage II	1.80*18%
Stage II	$0.32
Stage III	2.40*33%
Stage III	$0.79
Stage IV	3.20*60%
Stage IV	$1.92
b.
Aftertax income from cash dividend	No of shares outstanding*Dividend per share*(1-Tax rate)
Aftertax income from cash dividend	275*1.92*(1-0.15)
Aftertax income from cash dividend	$448.80
c.
Stock dividend or stock split would be utilized generally in growth or expansion stage which is Stage II or Stage III