Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2006. 

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of stock outstanding and its stock trades at $48 per share. 

a. The company had a 40 percent dividend payout ratio in 2005. If Bowles wants to maintain this payout ratio in 2006, what will be its per-share dividend in 2006? 

b. If the company maintains this 40 percent payout ratio, what will be the current dividend yield on the company’s stock? 

c. The company reported net income of $1.5 million in 2005. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2005? 

d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2006 that it paid in 2005. If it chooses this policy, what will be the company’s dividend payout ratio in 2006? 

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?

Transcribed Image Text:

Sales Operating costs including depreciation EBIT Interest EBT Taxes (40 percent) Net income $15,200 11,900 $ 3,300 300 $3,000 1,200 $1,800