A10. (Dividend adjustment model) Regional Software has made a bundleselling spre

ID: 2662117 • Letter: A

Question

A10.

(Dividend adjustment model) Regional Software has made a bundleselling spreadsheet software and has begun paying cash dividends.The firm’s chief financial officer would like the firm todistribute 25% of its annual earnings (POR = 0.25) and adjust thedividend rate to changes in earnings per share at the rate ADJ =0.75. Regional paid $1.00 per share in dividends last year. It willearn at least $8.00 per share this year and each year in theforeseeable future. Use the dividend adjustmentmodel, Equation(18.1), to calculate projected dividends per share for thisyear and the next four.

A10.

Explanation / Answer

Using Dividend Adjustment Model Calculate ProjectedDividends per share for the next four years:

EPSt = The firm's earnings in period t

DPSt = The dividend in period t

POR = Target Payout Ratio

ADJ = Dividend adjustment factor

Pay Out Ratio (POR) = Dividends / Earnings Aftertax = 0.25 (or) 25%

Dividend Adjustment Factor (ADJ) = 0.75

Dividend Paid in Lastyear (DPS0) = $1

Current year Earnings per 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