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 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 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. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

      
Stage I   $   0.40
Stage II      1.80
Stage III      2.70
Stage IV      3.30



b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)



c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Stage I unchecked
Stage II unchecked
Stage III unchecked
Stage IV uncheckedA 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 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 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. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

      
Stage I   $   0.40
Stage II      1.80
Stage III      2.70
Stage IV      3.30



b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)



c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Stage I unchecked
Stage II unchecked
Stage III unchecked
Stage IV uncheckedA 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 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 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. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

      
Stage I   $   0.40
Stage II      1.80
Stage III      2.70
Stage IV      3.30



b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)



c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Stage I unchecked
Stage II unchecked
Stage III unchecked
Stage IV uncheckedA 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 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 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. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

      
Stage I   $   0.40
Stage II      1.80
Stage III      2.70
Stage IV      3.30



b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)



c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Stage I unchecked
Stage II unchecked
Stage III unchecked
Stage IV unchecked

Answer 1

Dividend Pay-out ratio:

It is a percentage of the earnings paid out to the stockholders from the earnings after tax of the company in the form of dividends.

Formula:

Pay-out ratio = Dividend per share/ earnings per share

So, Dividend = Earnings per share*Pay-out %

a.  Cash dividend per share during each stage

Stage	Earnings per share $	Pay-out ratio	Dividend per share $
I	0.40	0	0
II	1.80	13%	0.234
III	2.70	37%	0.999
IV	3.30	59%	1.947

b.  Investor’s after-tax income from the cash dividend in Stage IV

Given: No. of shares- 325

            Tax Rate- 15%

            Pay-out ratio- 59%

            Earnings per share- 3.30

Total Dividend= No. of shares * (Earnings per share*pay-out ratio)

                        = 325* (3.30*59%)

                        = $ 632.775

After Tax Dividend= Dividend Amount (1- tax rate)

                               = 632.775 (1-.15)

                               = $ 537.86

c. Stock Splits

It is the decision made by the company in a specific decided ratio where existing shareholders are issued more shares for the outstanding shares. This action of the company does not affect the market value of the company. It is undertaken to make the company’s share more affordable to small investors.

After this, small investors will buy the shares increasing the demand for the company’s shares which eventually leads to an increase in the price of the company.

Company will issue stock splits in Stage III and Stage IV

Reason:

The company’s progress towards growth and expansion usually distributes less proportion of income and reserve those earnings as retained earnings, to finance future investment projects. For the given company, the Pay-out ratio is very high for both these stages so the company would be more interested to issue stock dividends instead of distributing income.