proportion to sales. The company also estimates that if sales increase 10 percent‚ spontaneous liabilities will increase by $1 million. If the company’s sales increase‚ its profit margin will remain at its current level. The company’s dividend payout ratio is 30 percent. Based on the AFN formula‚ how much additional capital must the company raise in order to support the 10 percent increase in sales? 7. Brown & Sons recently reported sales of $100 million‚ and net income equal to
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Chapter 158 Distributions to Shareholders: Dividends and Repurchases ANSWERS TO END-OF-CHAPTER QUESTIONS 158-1 a. The optimal distribution policy is one that strikes a balance between dividend yield and capital gains so that the firm’s stock price is maximized. b. The dividend irrelevance theory holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital. The principal proponents of this view are Merton Miller and Franco Modigliani (MM). They
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dividends twice a year: An Interim dividend A Final dividend A “Special” dividend • The dividend payout ratio quantifies the dividend policy decision 4 What is Dividend Policy? The Dividend Payout Ratio – An Ilustration EPS‚ DPS and Dividend Payout Ratio for CBA Ltd. 2001 Dividend per share (cents) Interim (cents) Final (cents) Total (cents) Earnings per share (cents) Dividend payout ratio 61 75 136 189.6 71.7% 68 82 150 209.3 71.7% 69 85 154 157.3 97.9% 79 104 183 196.8 93.0% 85 112
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AFN to be negative. c. If a firm increases its dividend payout ratio in anticipation of higher earnings‚ but sales and earnings actually decrease‚ then the firm’s actual AFN must‚ mathematically‚ exceed the previously calculated AFN. d. Higher sales usually require higher asset levels‚ and this leads to what we call AFN. However‚ the AFN will be zero if the firm chooses to retain all of its profits‚ i.e.‚ to have a zero dividend payout ratio. e. Dividend policy does not affect the requirement
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then stock A has a P/E ratio of 24/3 or 8. Is derived from the dividend discount model. Constant growth dividend discount model‚ P = D / r-g Where‚ D = E(1-b) => P = E(1-b) / r-g => P/E = (1-b) / r-g Where‚ (1-b)= dividend payout ratio b= ploughback ratio r= required rate of return g= expected growth rate Growth rate Internal growth rate‚ g= RoA * b / 1-(RoA * b ) where‚ RoA= m * Asset turnover m= net profit margin asset turnover= sales/asset External growth rate
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margin is calculated as net income divided by sales. The higher a firm’s profit margin‚ the larger the firm’s net income available to support increases in its assets. Consequently‚ the firm’s need for external financing will be lower. A firm’s payout ratio is calculated as dividends per share divided by earnings per share. The less of its income a company distributes as dividends‚ the larger its addition to retained earnings. Therefore‚ the firm’s need for external financing will be lower.
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A SURVEY OF DIVIDEND PRACTICES IN KENYA: A CASE STUDY OF QUOTED FIRMS IN THE NAIROBI STOCK EXCHANGE JUNE 2009 ACKNOWLEDGEMENT We are grateful to our supervisor‚ Mr. Luther Otieno for tirelessly guiding us throughout the writing of the project. Indeed‚ his encouragement and wise counsel greatly inspired us throughout the period we were writing this project. In addition‚ we thank all the lecturers at the University of Nairobi who taught us during our undergraduate studies. We are also grateful
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Unit VI DIVIDEND POLICY Dividend Policy • The return to the shareholders either by way of the dividend receipts or capital gains • It decides the Retention ratio & Pay out ratio • Earnings to be Distributed – High Vs. Low Payout • Objective – to Maximize Shareholders Return • Effects – Taxes‚ Investment & Financing Decision 2 A few models which studies this relationship & the dividend policies of firms are given below • • • • • Traditional Position Walter Model Gordon Model
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Evaluation on Share Repurchase Proposal of Blaine Kitchenware Inc. Group 7 Contents Executive Summary 3 Overview of problems 3 Analysis on Capital Structure & Payout Policies of Blaine 3 1. Inappropriate current capital structure and payout policies 3 2. Advantages and disadvantages of large share repurchase proposal 4 a. Effects of share repurchase on assets‚ liabilities and equity on balance sheet 5 b. Effects of share repurchase on debt ratios and interest coverage ratio 5 c. Effects of
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CHAPTER 17 Payout Policy Chapter Synopsis 17.1 Distributions to Shareholders A corporation’s payout policy determines if and when it will distribute cash to its shareholders by issuing a dividend or undertaking a stock repurchase. To issue a dividend‚ the firm’s board of directors must authorize the amount per share that will be paid on the declaration date. The firm pays the dividend to all shareholders of record on the record date. Because it takes three business days for shares to be registered
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