Question 5 (20 marks)

Part A (13 marks)

The Rockwood Co. just paid a dividend of 1.5 per share of stock. The following table lists the Rockwood Co.s earnings per share and dividend per share over time.

a) Assume the company strictly follows the Lintner model to develop its dividend payout policy. Please fill in the following table and show your steps according to Lintner model (Calculate the dividend three/four/five year from now).

b) Is dividend changes lead or lag earnings change? Briefly explain it.

Time	0	1	2	3	4	5
EPS	4	4	4.8	4.8	4	4
Div	1.5	1.6	1.8	Div(3)?	Div(4)?	Div(5)?

Part B (7 marks)

You own 4,000 shares of stock in Burklin Corporation. You will receive a $10 per share cash dividend in one year. In two years, Burklin will pay a liquidating dividend of $90 per share. The required return on Burklins stock is 12 percent. Ignore taxes and transaction costs.

a) What is the current share price of your stock? (2 marks)

b) If you would rather have equal dividends in each of the two years, show how you can accomplish this by creating homemade dividends. (5 marks)