13-1. (Dividend policies) Final earnings estimates for Chilean Health Spa & Fitn

Question

13-1. (Dividend policies) Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table. The firm has 7,500,000 shares of common stock outstanding. As assistant to the CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible policies: a.A stable dollar dividend targeted at 40 percent of earnings over a 5-year period b.A small, regular dividend of $0.60 per share plus a year-end extra when the profits in any year exceed $20,000,000. The year-end extra dividend will equal 50 percent of profits exceeding $20,000,000. c.A constant dividend payout ratio of 40 percent YEAR PROFITS AFTER TAXES 1 $ 18,000,000 2 $ 21,000,000 3 19,000,000 4 23,000,000 5 25,000,000

Explanation / Answer

sol: 40 (18+21+19+23+25)= 42.4/5= 8.48 8.48/7.5= $1.13 per share B. 1. .60 2. .60 +.5/7.5= $0.67 per share 3. .60 4. .60 +1.5/7.5= $.80 per share 5. .60 +2.5/7.5= $0.93 per share C 18*.4/7.5= $0.96 per share 21*.4/7.5= $1.12 per share 19*.4/7.5= $1.01 per share 23*.4/7.5= $1.23 per share 25*.4/7.5= $1.33 per share

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