1.Quantitative Problem: After a 4-for-1 stock split, Perry Enterprises paid a di

Question

1.Quantitative Problem: After a 4-for-1 stock split, Perry Enterprises paid a dividend of $1.40 per new share, which represents a 8% increase over last year's pre-split dividend. What was last year's dividend per share? Round your answer to the nearest cent.
$ ---------

2.Quantitative Problem: Lane Industries is considering three independent projects, each of which requires a $2.3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:

Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 40% debt and 60% common equity, and it expects to have net income of $4,400,000. If Lane establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to 2 decimal places.
---------%

Project H (high risk): Cost of capital = 14% IRR = 16% Project M (medium risk): Cost of capital = 10% IRR = 8% Project L (low risk): Cost of capital = 10% IRR = 11%

Explanation / Answer

The calculation of last year's dividend per share has been shown below:

Pre-Split Dividend (before dividend payment) = Dividend Per Share after Split*(Stock Split Ratio) = 1.4*4 = $5.6 per share

This year's pre-split dividend will be equal to last year's dividend*(1+Increase Percentage). Using the details provided in the question, we can derive the following equation:

Pre-Split Dividend for the Current Year = Last Year Dividend*(1+7%)

or

5.6 = Last Year Dividend*(1+8%)

Rearranging Values, we get,

Last Year Dividend = 5.60/(1+8%) = $5.18

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