Question

Brooks Sporting Inc. is prepared to report the following 2016 income statement (shown in thousands of dollars).

Sales	$12800
Operating costs including depreciation	9088
EBIT	$3712
Interest	297
EBT	$3415
Taxes (40%)	1366
Net income	$2049

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 470000 shares of stock outstanding, and its common stock trades at $51 per share.

a. The company had a 45% dividend payout ratio in 2015. If Brooks wants to maintain this payout ratio in 2016, what will be its per-share dividend in 2016? Round your answer to the nearest cent.

b. If the company maintains this 45% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places.

c. The company reported net income of $1.8 million in 2015. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2015? Round your answer to the nearest cent.

d. As an alternative to maintaining the same dividend payout ratio, Brooks is considering maintaining the same per-share dividend in 2016 that it paid in 2015. If it chooses this policy, what will be the company's dividend payout ratio in 2016? Round your answer to two decimal places.

e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend?

I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to    maintain a constant dividend payout ratio.

II. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend.

Answer 1

Net Income = 2,049,000

Dividend payout = 45% of Net Income = 0.45 * 2049000 = 922,050

Per Share Dividend = 922,050 / 470,000 = 1.96

B. Dividend Yield = Dividend Paid out/ Stock Price = 1.96 / 51 = 3.84%

C. Net Income in 2015 = 1,800,000

Dividend Payout = 0.45 * 1,800,000 = 810,000

Dividend Per Share = 1.72

d. If Dividend per share remains same in 2016 then Dividend Per share = 1.72

Total Dividend Paid out = 1.72 * 470,000 = 810,000

Dividend payout ratio = 810,000/ 2049000 = 39.53%