(Dividend adjustment model) Regional Software has made a bundle selling spreadsh

Question

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

Explanation / Answer

According to the given information, DPS0 = Dividend per share in year-0 POR = Target payout ratio EPS = The firms earnings in period-t ADJ = Dividend adjustment factor DPS0 = POR (EPS0) $1.00 = 0.25 * EPS0 EPS0 = $4 DPS1 = DPS0 + ADJ [POR (EPS1) - DPS0]           = $1.00 + 0.75 [ 0.25 ($8.00) - $1.00]           = $1.00 + 0.75           = $1.75 DPS2 = DPS1 + ADJ [POR (EPS1) - DPS1]           = $1.75 + 0.75 [ 0.25 ($8.00) - $1.75]           = $1.75 + 0.1875           = $1.9375 DPS3 = DPS2 + ADJ [POR (EPS1) - DPS2]           = $1.9375 + 0.75 [ 0.25 ($8.00) - $1.9375]           = $1.9375 + 0.047           = $1.98 DPS4 = DPS3 + ADJ [POR (EPS1) - DPS3]           = $1.98 + 0.75 [ 0.25 ($8.00) - $1.98]           = $1.98 + 0.015           = $1.995 or $2.00 DPS5 = DPS4 + ADJ [POR (EPS1) - DPS4]           = $2.00 + 0.75 [ 0.25 ($8.00) - $2.00]           = $2.00 + 0.00           = $2.00           = $1.75 + 0.75 [ 0.25 ($8.00) - $1.75]           = $1.75 + 0.1875           = $1.9375 DPS3 = DPS2 + ADJ [POR (EPS1) - DPS2]           = $1.9375 + 0.75 [ 0.25 ($8.00) - $1.9375]           = $1.9375 + 0.047           = $1.98 DPS4 = DPS3 + ADJ [POR (EPS1) - DPS3]           = $1.98 + 0.75 [ 0.25 ($8.00) - $1.98]           = $1.98 + 0.015           = $1.995 or $2.00 DPS5 = DPS4 + ADJ [POR (EPS1) - DPS4]           = $2.00 + 0.75 [ 0.25 ($8.00) - $2.00]           = $2.00 + 0.00           = $2.00           = $1.9375 + 0.75 [ 0.25 ($8.00) - $1.9375]           = $1.9375 + 0.047           = $1.98 DPS4 = DPS3 + ADJ [POR (EPS1) - DPS3]           = $1.98 + 0.75 [ 0.25 ($8.00) - $1.98]           = $1.98 + 0.015           = $1.995 or $2.00 DPS5 = DPS4 + ADJ [POR (EPS1) - DPS4]           = $2.00 + 0.75 [ 0.25 ($8.00) - $2.00]           = $2.00 + 0.00           = $2.00           = $1.98 + 0.75 [ 0.25 ($8.00) - $1.98]           = $1.98 + 0.015           = $1.995 or $2.00 DPS5 = DPS4 + ADJ [POR (EPS1) - DPS4]           = $2.00 + 0.75 [ 0.25 ($8.00) - $2.00]           = $2.00 + 0.00           = $2.00           = $2.00 + 0.75 [ 0.25 ($8.00) - $2.00]           = $2.00 + 0.00           = $2.00

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.