Finance_SL5 by ClassOf1

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Sub: Finance                                                                            Topic: Dividend Policy

Question:

Calculation of Projected Dividends

(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and
has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25%
of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at
the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per
share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation
(18.1), to calculate projected dividends per share for this year and the next four.

Equation 18.1




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 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
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Sub: Finance                                                                            Topic: Dividend Policy

Solution :



As per the equation 18.1,


DPS₁ - DPS₀ = ADJ [ POR (EPS₁) -DPS₀]


where, DPS₁ = Dividend per share next year
DPS₀ = Current dividend per share
ADJ = Adjustment Factor
POR = Payout ratio
EPS₁ = Earnings per share next year
EPS₀ = Current EPS


So, DPSn -DPS(n-1) = ADJ [ POR (EPS n) -DPS(n-1)]
Or, DPS n = ADJ [ POR (EPS n) -DPS(n-1)]+DPS(n-1)


Given,
DPS₀ =                                          $      1.00
ADJ =                                           0.74
POR =                                           0.25
EPS₁ =                                          $      8.00
EPS₂ =                                          $      8.00
EPS₃ =                                          $      8.00
EPS₄ =                                          $      8.00



                              www.classof1.com/homework-help/finance
 *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for
                              submitting the same in lieu of their academic submissions for grades.
Sub: Finance                                                                            Topic: Dividend Policy
Using he above formula,
DPS₁ = ADJ [ POR (EPS₁) -DPS₀]+DPSⁿ₀)


so, DPS₁ = 0.74[0.25(8)-1]+1 =                                      $      1.74


DPS₂ = ADJ [ POR (EPS₂) -DPS₁]+DPS₁)


DPS₂ = 0.74[0.25(8)-1.74]+1.74=                                     $      1.93



DPS₃ = ADJ [ POR (EPS₃) -DPS₂]+DPS₂)


DPS₃ = 0.74[0.25(8)-1.93]+1.93 =                                    $      1.98



DPS ₄= ADJ [ POR (EPS₄) -DPS₃]+DPS₃


DPS₄ = 0.74[0.25(8)-1.98]+1.98 =                                    $      2.00




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