# Finance_SL5

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```					                 Finance

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Sub: Finance                                                                            Topic: Dividend Policy

Question:

Calculation of Projected Dividends

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
(18.1), to calculate projected dividends per share for this year and the next four.

Equation 18.1

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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
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
POR =                                           0.25
EPS₁ =                                          \$      8.00
EPS₂ =                                          \$      8.00
EPS₃ =                                          \$      8.00
EPS₄ =                                          \$      8.00

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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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