Question

"Last year, Fielding Corp. had earnings of $1.50 per share and paid a dividend of $0.50. For the current year, the company anticipates earnings of $2.00. It has a 30% target payout ratio and uses a five‐year period to adjust the dividend. Compute the expected dividend for the current year under the target payout adjustment model.

a) $0.53
b) $0.65
c) $0.75
d) $0.60

Answer 1

To calculate the expected dividend for the current year using the target payout adjustment model, multiply the earnings per share by the target payout ratio, then adjust the dividend for the five-year period using a present value calculation.

Step-by-step explanation:

To compute the expected dividend for the current year under the target payout adjustment model, we first need to calculate the target dividend and then adjust it for the five-year period.

1. Calculate the target dividend by multiplying the earnings per share by the target payout ratio. In this case, the target dividend is $2.00 x 0.30 = $0.60 per share.
2. Next, we need to adjust the dividend for the five-year period. We do this by using a present value calculation.
3. Given that the company uses a 30% discount rate and a five-year period, we can calculate the present value of the dividend using the formula: Present Value = Dividend / (1 + Discount Rate)^(Number of Years)
4. Using the formula, we can calculate the present value of the dividend for each year and sum them up to get the final adjusted dividend for the current year.

Calculating the present value of the estimated dividends for each year:

• Year 1: $0.60 / (1 + 0.30)^1 = $0.4615
• Year 2: $0.60 / (1 + 0.30)^2 = $0.3554
• Year 3: $0.60 / (1 + 0.30)^3 = $0.2734
• Year 4: $0.60 / (1 + 0.30)^4 = $0.2103
• Year 5: $0.60 / (1 + 0.30)^5 = $0.1618

Summing up the present values, we get: $0.4615 + $0.3554 + $0.2734 + $0.2103 + $0.1618 = $1.4624

Therefore, the expected dividend for the current year under the target payout adjustment model is $1.4624 per share.