L012-3, LO12-5 EXERCISE 12.14 EPS and Dividends Using Home Depot, Inc., Financia
ID: 2530582 • Letter: L
Question
L012-3, LO12-5 EXERCISE 12.14 EPS and Dividends Using Home Depot, Inc., Financial Statements Home Depot, Inc.'s income statements for 2013, 2014, and 2015 show basic earnings per share of $3.78, $4.74, and $5.49, respectively. Diluted earnings per share figures are slightly lower than these numbers, indicating the impact of potential capital stock activity that could reduce earnings per share for current stockholders The company paid cash dividends of $1.56 per share in 2013, $1.88 per share in 2014, and Why do you think Home Depot is paying out only about 40 percent of its net income to stock- If you were an investor in Home Depot's stock, would you be unhappy because your dividends $2.36 per share in 2015. a. holders in the form of cash dividends? b. represented about 40% of the company's net income?Explanation / Answer
a)
Dividend distribution is completely a psychological factor. If return on equity earned by company on ploughed back profits (ROE) is greater than return required by shareholders (Re) then company should retain 100% net profit with it and cash dividend should be 0% but Zero cash dividends creates negative impact in the minds of shareholder because few shareholders take shares to earn dividend. So, in order to maintain continuity in the payment of dividend, Home Depot is paying dividend only about 40% of its net income and retained 60% of net income to finance future projects available before the company to enhance earning per share.
b)
If an investor has taken shares of company to earn dividend then definitely he or she would be unhappy because percentage of dividend is only 40% but at the same time, if an investor has taken shares for capital appreciation then he would be happy because currently investor is gaining dividend on shares and in future, he will take capital appreciation which will be reflected in the price of shares.So, happiness index depends on psychology of investor.
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