Year 2015: The market price of the Chimes Co’s shares was £84 prior to a 3:1 spl

Question

Year 2015: The market price of the Chimes Co’s shares was £84 prior to a 3:1 split last year. The company’s £3.20 dividend on the new split shares represents an increase of 20% over last year’s dividend on the presplit stock.

Year 2016: The company has 5,000,000 shares outstanding and annual earnings before interest and tax of £100,000,000. Its interest expenses are £20,000,000 per year, and it pays £10,000,000 p.a. in dividends to its shareholders. The corporate tax rate is 40% and its ordinary share’s current dividend yield is 2%.

On 1 April 2016, the BOD of the company declared annual dividends on the ordinary shares. The dividends are payable on 22 May 2016 to shareholders of record on Tuesday 22 April 2016. As announced, it is the 32nd consecutive regular annual dividend on the ordinary shares.

Required:

a) What was the year 2014 dividend per share?

b) Calculate the company’s dividend payout ratio.

c) Calculate the company’s current share price.

d) Calculate the company’s earnings per share.

e) What is an ex-dividend date in year 2016? What is a meaning of ex-dividend date?

Explanation / Answer

a) Number of Shares after Stock Split - 5000000

Let the number of Shares before Stock Split be x

So, x + 3x = 5000000 that is x = 1250000

Dividend on new Split Shares - 3.20

Dividend on Presplit stock will be = 3.20/120% x 100% = 2.67 Pounds

b) Earnings before Interest & Tax - 100000000

Less- Interest Expense - 20000000  

Earning Before Tax - 80000000

Tax on EBT@ 40% - 32000000

Earnings after Tax - 48000000

Dividend Paid - 10000000

Dividend Pay Out Ratio = Dividend Paid/Net Income that is 10000000/48000000 = 20.83%

c) Dividend per share - 10000000/5000000= 2 Pounds

Dividend Yield - 2%

Current Share Price = Dividend/Dividend Yield = 2/2%= 100 pounds

d) EPS = Net Income/ No. of Shares = 48000000/5000000 = 9.6 Pounds

e) Ex Dividend Date is normally 2 business days before Record Date which is 22 April 16 in this case. Therefore Ex Dividend date will be 20th April 2016. After the Ex Dividend Date, the buyer of the stock will not get the dividend, but Seller will get dividend. Therefore, after Ex dividend date, the stock will be traded ex-dividend only.

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