Question

Delcon Incorporation is prepared to report the following income statement for the year
2019.
Sales 1,52,00,000
Less, operating cost 1,19,00,000
EBIT 33,00,000
Less, interest 3,00,000
Earning before tax 30,00,000
Les, Tax @ 40% 12,00,000
Net income 18,00,000Prior to reporting these income statements, the company wants to determine its annual
dividend. The company has 5,00,000 shares of stock outstanding and its stock trades at Rs
48 per share.
a. The company had a 40% dividend payout ratio in 2018. If the company wants to
maintain this payout ratio in 2019, what will be its per share dividend in 2019?
b. If the company maintains this 40% payout ratio, what will be the current yield of the
company's stock?
c. The company reported net income of Rs 1500,000 in 2018. Assume that the number of
shares outstanding has remained constant. What was the company’s per share dividend
in 2018?
d. As an alternative to maintain the same dividend payout ratio, the company is
considering maintaining the same dividend per share in 2019 that it paid in 2018. If it
chooses this policy, what will be the company's dividend payout ratio in 2019?
e. Does the dividend policy of the organization affect the price of the stock?

Answer 1

Answer:-

The following informations are given in the question:-

Net income in 2019 = 18,00,000

Dividend payout ratio = 40% = 0.40

Number of shares = 5,00,000

Current stock price per share = Rs. 48

a.)

The formula for Per Share Dividend in 2019 is given by:-

Per Share Dividend = Total Dividend / Number of shares

Step 1

First, we want to calculate the Total Divident to calculate per share dividend

Total Dividend = Net income in 2019 x Dividend payout ratio

= 18,00,000 x 40%

= Rs. 720,000

Step 2

Per Share Dividend in 2019 = Total Dividend / Number of shares

= 720,000 / 5,00,000

= Rs. 1.44

Company’s per share dividend in 2019 = Rs. 1.44

b.) The formula for Dividend yield is given by:-

Dividend yield = Divident per share / Current stock price per share

= 1.44 / 48

= 0.03 %

Current yield of the company's stock = 0.03%

c.) The formula for Per Share Dividend in 2018 is given by:-

Per Share Dividend = Total Dividend / Number of shares

Step 1

First, we want to calculate the Total Divident to calculate per share dividend

Total Dividend = Net income in 2018 x Dividend payout ratio

=  1500,000 x 40%

= Rs. 600,000

Step 2

Per Share Dividend in 2018 = Total Dividend / Number of shares

= 600,000 / 5,00,000

= Rs. 1.2

Company’s per share dividend in 2018 = Rs. 1.2

d.) The following informations are given in the question:-

Net income in 2019 = 18,00,000

Dividend per share in 2018 = Rs. 1.2 ( it is given that Dividend per share paid in 2018 is same as Dividend per share in 2019)

Number of shares = 5,00,000

Therefore, Total dividend = Dividend per share in 2018 x Number of shares

= Rs. 1.2 x  5,00,000

= 600,000

Dividend payout ratio = Total dividend / Net income in 2019

= 600,000 / 18,00,000

= 0.33 %

Dividend payout ratio in 2019 = 0.33%

e.) Yes. The Dividend policy of the firm affects the price of the stock. Dividend policy plays an important role in attracting the investors and strengthening the capital structure of the firm. Dividend policy describes what amount of dividend is paid to the shareholders from the profit earned in one financial year and how much to retain for future investments. The factors that affect the dividend policy and stock price are investment opportunity, capital structure, earnings of the firm etc.