Question

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 20 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 39 percent and will eventually reach 54 percent during the maturity stage (IV).

A. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage.
Stage I $0.30
Stage II 1.95
Stage III 2.80
Stage IV 3.40
B. Assume in Stage IV that an investor owns 290 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend?
C. In what two stages is the firm most likely to utilize stock dividends or stock splits?

Answer 1

(a). Stage 1 = $0

Stage 2 = $0.39

Stage 3 = $1.092

Stage 4 = $1.836

(b)After Tax income = $452.574

Step-by-step explanation:

As per the data given in the question,

A) Dividend per share = Dividend payout ratio × earning per share

Stages DPS=Payoyt ratio×EPS DPS

Stage 1 = 0.00 ×$0.30 $0

Stage 2 = 0.20 ×$1.95 $0.39

Stage 3 = 0.39 ×$2.80 $1.092

Stage 4 = 0.54 ×$3.40 $1.836

B)

Cash dividend = No. of shares × DPS in stage 4

=290 × $1.836

= $532.44

After Tax income = Dividend(1-Tax rate)

=532.44 ×(1-0.15)

=$452.574

C) In stage II for growth and in stage III for expansion, the firm is likely to utilize stock dividend.