A local financial consultant made this statement at a seminar you attended: "The residual dividend approach is the best dividend policy to adopt if a firm's management wants to maximize the current value per share of the existing stock."
Do you agree or disagree with this statement? State and justify your conclusions.
A local financial consultant made this statement at a seminar you attended: "The residual dividend approach is the best dividend policy to adopt if a firm's management wants to maximize the current value per share of the existing stock."
Do you agree or disagree with this statement? State and justify your conclusions.
Related questions
Dividends
Bowles Sporting Inc. is prepared to report the following 2012 income statement (shown in thousands of dollars).
| Sales | $10,900 |
| Operating costs including depreciation | 7,957 |
| EBIT | $2,943 |
| Interest | 363 |
| EBT | $2,580 |
| Taxes (40%) | 1,032 |
| Net income | $1,548 |
Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 350,000 shares of stock outstanding, and its stock trades at $54 per share.
A. The company had a 60% dividend payout ratio in 2011. If Bowles wants to maintain this payout ratio in 2012, what will be its per-share dividend in 2012? Round your answer to the nearest cent.
$ _____
B. If the company maintains this 60% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places.
_____%
C. The company reported net income of $1.25 million in 2011. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2011? Round your answer to the nearest cent.
$ _____
D. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2012 that it paid in 2011. If it chooses this policy, what will be the company's dividend payout ratio in 2012? Round your answer to two decimal places.
% _____
E. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? Selct I or II below.
I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend.
II. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain a constant dividend payout ratio.
Dividends
Bowles Sporting Inc. is prepared to report the following 2012 income statement (shown in thousands of dollars).
| Sales | $19,100 |
| Operating costs including depreciation | 14,707 |
| EBIT | $4,393 |
| Interest | 363 |
| EBT | $4,030 |
| Taxes (40%) | 1,612 |
| Net income | $2,418 |
Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 550,000 shares of stock outstanding, and its stock trades at $47 per share.
The company had a 60% dividend payout ratio in 2011. If Bowles wants to maintain this payout ratio in 2012, what will be its per-share dividend in 2012? Round your answer to the nearest cent.
$
If the company maintains this 60% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places.
%
The company reported net income of $2.2 million in 2011. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2011? Round your answer to the nearest cent.
$
As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2012 that it paid in 2011. If it chooses this policy, what will be the company's dividend payout ratio in 2012? Round your answer to two decimal places.
%
Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend?
I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend.
II. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain a constant dividend payout ratio.
