Question

Last year Ganede Inc. had earnings of $1.90 per share and paid a regular dividend of $0.30. For the current year, the company anticipates earnings of $2.70. It has a 20% target payout ratio and uses a three‐year period to adjust the dividend. The expected payout ratio for the current year is closest to:

a) 13%.
b) 17%.
c) 20%.

Answer 1

To find the expected payout ratio for the current year, we need to calculate the average earnings per share over the past three years and then determine the expected dividend. Using the given information, the expected payout ratio for the current year is closest to 20%. The correct option is c.

Step-by-step explanation:

The student is asking about the expected payout ratio for the current year, given the company's earnings and dividend history. The company has a target payout ratio of 20% and uses a three-year period to adjust the dividend. Last year's earnings per share were $1.90, and the regular dividend paid was $0.30. This year, the company anticipates earnings of $2.70. To calculate the expected payout ratio, we need to find the average earnings per share over the past three years.

Using the information provided, we can calculate the average earnings per share over the past three years as follows:

1. Last year's earnings per share: $1.90
2. This year's anticipated earnings per share: $2.70
3. Earnings per share two years ago: Let's call this x.

We can now solve for x by setting up an equation:

$2.70 = (1/3)($1.90 + x)

By solving this equation, we find that x = $3.00.

The average earnings per share over the past three years is then ($1.90 + $2.70 + $3.00)/3 = $2.53.

Now, let's calculate the expected dividend for the current year:

Expected dividend = (Payout ratio) × (Earnings per share) = (20%) × ($2.53) = $0.51.

Therefore, the expected payout ratio for the current year is $0.51/$2.70 = 18.89% which is closest to 20%. So, the answer is c) 20%.