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 14 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 36 percent and will eventually reach 59 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		1.70
Stage III		2.90
Stage IV		3.20

b. Assume in Stage IV that an investor owns 280 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 IVunanswered

Answer 1

Answer a)

Stage	Cash dividend per share
Stage I	$0
Stage II	$0.24
Stage III	$1.04
Stage IV	$1.89

Answer b)

EPS in case of Stage IV is $3.20

Accordingly Dividend per share is $1.8888

If investor own 280 shares total dividend in his hands before tax is $528.64

Tax payable is $528.64*15% = $79.296

Therefore dividend after tax recieved is $449.344

Investor’s aftertax income from the cash dividend (round off) is $449.34

Answer c)

During Stage I and Stage II, the firm most likely to utilize stock dividends or stock splits. This is due to the reason that the firm is in expansion mode and may need more funds to expand business operations.