A stock’s 2009 Earnings-per-share is $4.50. Its Payout Ratio is 30%. Next year in 2010 it expects its Earnings-per-share to be $4.75. Answer the following two questions please, and select the correct choice:
1. What is the current 2009 dividend?
2. What will next year’s Payout Ratio be if the company want to maintain a dividend growth rate of 15%?
a. Dividend= $1.35 and Payout Ratio= 30%
b. Dividend= $1.20 and Payout Ratio= 32.6%
c. Dividend= $1.20 and Payout Ratio= 30%
d. Dividend= $1.35 and Payout Ratio= 32.6%
Why are you posting all these under different names? We are not going to take your test for you.
To answer these questions, you need to understand the formulas for dividend and payout ratio.
1. To calculate the current 2009 dividend:
Dividend = Earnings-per-share * Payout Ratio
Dividend = $4.50 * 30% = $1.35
2. To calculate the next year's Payout Ratio:
Dividend growth rate = (Dividend in 2010 - Dividend in 2009) / Dividend in 2009
15% = (Dividend in 2010 - $1.35) / $1.35
Solving for Dividend in 2010:
Dividend in 2010 = $1.35 * (1 + 15%) = $1.35 * 1.15 = $1.5525
Payout Ratio = Dividend in 2010 / Earnings-per-share in 2010
Payout Ratio = $1.5525 / $4.75
Now let's evaluate the answer choices:
a. Dividend = $1.35 and Payout Ratio = 30%
b. Dividend = $1.20 and Payout Ratio = 32.6%
c. Dividend = $1.20 and Payout Ratio = 30%
d. Dividend = $1.35 and Payout Ratio = 32.6%
From our calculations:
The correct answer for the current 2009 dividend is $1.35, so options a and d are possible.
Next, let's calculate the next year's Payout Ratio:
Payout Ratio = $1.5525 / $4.75 ≈ 32.6%
Therefore, the correct answer is option d: Dividend = $1.35 and Payout Ratio = 32.6%.