(Dividend adjustment model) Regional software has made abundle selling spreadshe

Question

(Dividend adjustment model) Regional software has made abundle selling spreadsheet software and has begun paying cashdividends. The firm’s chief financial officer would likethe firm to distribute 25% of its annual earnings (POR=0.25) andadjust the dividend rate to changes in earnings per share at therate ADJ=0.75. Regional paid $1.00 per share in dividends lastyear. It will earn at least $8.00 per share this year and eachyear in the foreseeable future. Use the dividend adjustmentmodel, Equation (18.1), to calculate projected dividends per sharefor this year and the next four.

Adjustment model 18.1 -

Explanation / Answer

Using DividendAdjustment Model Calculate Projected Dividends per share for thenext four years: EPSt = The firm'searnings in period t DPSt = Thedividend in period t POR = Target PayoutRatio ADJ   = Dividendadjustment factor Pay Out Ratio(POR) = Dividends / Earnings After tax = 0.25(or) 25% Dividend Adjustment Factor(ADJ) = 0.75 Dividend Paid in Lastyear (DPS0) = $1 Current year Earningsper share (EPS1) = $8 DPS1 = DPS0 +ADJ [POR (EPS1) - DPS0] DPS1 = $1 + 0.75 [0.25($8) - $1] DPS1 =$1.75 DPS2 =DPS1 + ADJ [POR (EPS1) -DPS1] DPS2 = $1.75 +0.75[0.25($8) - $1.75] DPS2 =$1.9375 DPS3 =DPS2 + ADJ [POR (EPS1) -DPS2] DPS3 = $1.9375 +0.75[0.25($8) - $1.9375] DPS3 =$1.984375 DPS4 =DPS3 + ADJ [POR (EPS1) -DPS3] DPS4 =$1.984375 + 0.75[0.25($8) - $1.984375] DPS4 =$1.9961 Using DividendAdjustment Model Calculate Projected Dividends per share for thenext four years: EPSt = The firm'searnings in period t DPSt = Thedividend in period t POR = Target PayoutRatio ADJ   = Dividendadjustment factor Pay Out Ratio(POR) = Dividends / Earnings After tax = 0.25(or) 25% Dividend Adjustment Factor(ADJ) = 0.75 Dividend Paid in Lastyear (DPS0) = $1 Current year Earningsper share (EPS1) = $8 DPS1 = DPS0 +ADJ [POR (EPS1) - DPS0] DPS1 = $1 + 0.75 [0.25($8) - $1] DPS1 =$1.75 DPS2 =DPS1 + ADJ [POR (EPS1) -DPS1] DPS2 = $1.75 +0.75[0.25($8) - $1.75] DPS2 =$1.9375 DPS3 =DPS2 + ADJ [POR (EPS1) -DPS2] DPS3 = $1.9375 +0.75[0.25($8) - $1.9375] DPS3 =$1.984375 DPS4 =DPS3 + ADJ [POR (EPS1) -DPS3] DPS4 =$1.984375 + 0.75[0.25($8) - $1.984375] DPS4 =$1.9961

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