Question

how did we get (1,075,000) on answer B below?

also on C where did 0.16 in year 2 and 0.28 in year 4 come from?

66)Trevor Co.'s future earnings for the next four years are predicted below. Assuming there are 500,000 shares outstanding, what will the yearly dividend per share be if the dividend policy is

Trevor & Co.

1   $ 900,000

2   1,200,000

3      850,000

4   1,350,000

a.   a constant payout ratio of 40%

b.   stable dollar dividend targeted at 40% of the average earnings over the four-year period

c.    small, regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000

Answer:

a.  

.40(900,000)/500,000         =    $0.72

.40(1,200,000)/500,000      =      0.96

.40(850,000)/500,000         =      0.68

.40(1,350,000)/500,000      =      1.08

b.   .40(1,075,000) =   $430,000/500,000      $0.86

c.  

Year 1     $0.75                 =     $0.75

Year 2      0.75 + 0.16        =       0.91

Year 3      0.75                  =       0.75

Year 4      0.75 + 0.28        =       1.03

Answer 1

Clarification on answer B) :

1075000 has come from average earnings over the 4 year period. Refer followings :

Average earnings = Earnings for 4 years / No. Of years

Average earnings = (900000 + 1200000 + 850000 + 1350000) / 4 years

Average earnings = 4300000 / 4 = 1075000

Clarification on Answer C) :

40% dividend paid in excess of 1000000 earnings and distributed over 500000 shares. Refer followings :

i ) Year 2 = 0.75 + ( (40% * (1200000 - 1000000))/ 500000 shares )

Year 2 = 0.75 + ((40% * 200000)/500000 shares)

Year 2 = 0.75 + (80000 / 500000 shares)

Year 2 = 0.75 + 0.16 = 0.91

ii ) Year 4 = 0.75 + ((40% * (1350000 - 1000000))/ 500000 shares)

Year 4 = 0.75 + ( (40% * 350000)/500000 shares)

Year 4 = 0.75 + (140000 / 500000 shares)

Year 4 = 0.75 + 0.28 = 1.03