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Chapter 14 (7)

DIVIDENDS

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

Sales: 15,300

Operating Costs Including Depreciation: 12,240

EBIT: 3,060

Interest: 330

EBT 2,730

Taxes (40%) 1,092

Net Income 1,638

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Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 320,000 shares of common stock outstanding, and its stock trades at $37 per share.

The company had a 25% dividend payout ratio in 2015. If Brooks wants to maintain this payout ratio in 2016, what will be its per-share dividend in 2016?

Dividend payout ratio in 2016:25%

EPS in 2016:1,638,000/320,000 = $5.118

DPS in 2016: = 25% * 5.118 = $1.279

If the company maintains this 25% payout ratio, what will be the current dividend yield on the company's stock?

Dividend Yield = Annual Dividend/Stock Price = $1.279/$37.00 = 3.45%

The company reported net income of $1.35 million in 2015. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2015?

EPS in 2015:1,350,000/320,000 = $4.218

DPS in 2015:.25(4.218) = $1.504

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?

DPS in 2016:$1.054

Dividend Payout Ratio in 2016:1.054/5.118 = 20.59%

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? Explain.

With the amount of capital the company is expected to expand with, without any issue of new equity, it will likely need to use retained earnings.Because of this, the retention ration must be high which equals the dividend payout ratio being lower.It makes more sense for the company to maintain the same per-share dividend instead of a constant dividend payout ratio.