Question

​(Dividend policies​) Final earnings estimates for Chilean Health Spa​ & Fitness Center have been prepared for the CFO of the company and are shown in the following​ table: LOADING... . The firm has 7 comma 700 comma 000 shares of common stock outstanding. As assistant to the​ CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible​ policies: a. A stable dollar dividend targeted at 50 percent of earnings over a​ 5-year period. b. A​ small, regular dividend of ​$0.60 per share plus a​ year-end extra when the profits in any year exceed ​$19 comma 000 comma 000 . The​ year-end extra dividend will equal 60 percent of profits exceeding ​$19 comma 000 comma 000 . c. A constant dividend payout ratio of 45 percent.

YEAR   PROFITS AFTER TAXES
1   17,000,000
2   20,000,000
3   18,000,000
4   22,000,000
5   24,000,000

Answer 1

a)

number of shares = 7,700,000 i.e.,7.7 million

average profit = (17+20+18+22+24) / 5 = 20.2

pay out = 50% that is 20.2*50% = 10.1

EPS = 10.1 / 7.7 = $1.31

b)

1)

profit did not exceed $19 million so dividend = $0.6

2)

profit exceeds $19 million. extra = 20 - 19 = 1

pay out = 60%

so $1million x 60% = 0.6 million

dividend per share = 0.6 +(0.6 / 7.7) = $0.678

3)

profit did not exceed $19 million so dividend = $0.6

4)

profit exceeds $19 million. extra = 22 - 19 = 3

pay out = 60%

so $3million x 60% = 1.8 million

dividend per share = 0.6 +(1.8 / 7.7) = $0.834

5)

profit exceeds $19 million. extra = 24 - 19 = 5

pay out = 60%

so $5million x 60% = 3 million

dividend per share = 0.6 +(3 / 7.7) = $0.99

c)

here dividend payout ratio = 45%

1) dividend = (17 x 0.45) / 7.7 = $0.99

2)dividend = (20 x 0.45) / 7.7 = $1.17

3)dividend = (18 x 0.45) / 7.7 = $1.05

4)dividend = (22 x 0.45) / 7.7 = $1.29

5)dividend = (24 x 0.45) / 7.7 = $1.40