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Awholly equity financedcompany has the following objectives:
1. Increase inprofit before interest and tax by at least 10% per year.
2. Maintain a dividend payoutratio of40% of earningsper year.
Relevant data:
* There are 2 million shares in issue.
* Profit before interest and tax in the last financial year was$5million.
* The corporateincometax rateis30%.
At the beginning of the current financial year, the company raised long term debt of $2 million at 10% interesteachyear.
Calculate the dividend per share that will be announced this year assuming the company achieves its objective of increasing profit before interest and tax by 10%.
Suggested Answer: A, C
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29 comments · newest first
CI
Ciara
11 months ago
Is the tax rate really going to affect the dividends that much?
GW
Gwenn
11 months ago
I calculated it, and I think it’s $1.01 per share!
EL
Elly
11 months ago
Wait, how can they maintain a 40% payout with new debt?
VE
Vernice
12 months ago
Totally agree, that 10% increase is doable!
JO
Joaquin
12 months ago
The profit before interest and tax will be $5.5 million this year.
FA
Fairy
12 months ago
I’m pretty sure we need to calculate the profit after tax first, then apply the 40% payout ratio. I just hope I remember the right steps!
FR
Francine
1 year ago
I feel like the dividend payout ratio is straightforward, but I’m confused about how to factor in the interest expense from the new debt. Did we cover that in class?
QU
Quiana
1 year ago
I think if the profit before interest and tax increases by 10%, we need to calculate the new profit and then apply the tax rate. That sounds familiar from our last mock exam.
BU
Buddy
1 year ago
I remember we practiced calculating profit before tax and dividends, but I'm a bit unsure about how the interest from the debt affects the final profit.
LO
Lorrine
1 year ago
I think I've got it! The key is to use the 10% increase in profit before interest and tax, then factor in the interest expense and tax to get the final net profit. From there, the 40% dividend payout ratio will give me the total dividends, which I can divide by the number of shares.
AS
Ashley
1 year ago
I'm a bit confused by the dividend payout ratio requirement. Do I need to calculate the total dividends first, then divide by the number of shares? Or is there a more direct way to get the dividend per share?
YV
Yvonne
1 year ago
Okay, let me see if I can break this down step-by-step. First, I need to calculate the new profit before interest and tax, then factor in the interest expense and tax to get the net profit. From there, I can determine the dividend per share.
CH
Chun
1 year ago
This looks like a straightforward calculation problem, but I'll need to carefully work through the given information to make sure I don't miss anything.
JE
Jennifer
1 year ago
Alright, time to put on my calculator hat and crunch some numbers. 10% increase in profit, 40% dividend payout ratio... Aha! Option A, $0.74 per share, is the winner. Time to collect my prize and buy myself a nice, shiny new protractor.
NO
Noble
1 year ago
Great job on figuring out the dividend per share, option A it is!
LI
Lindsey
1 year ago
I agree, the calculations point to option A as the dividend per share.
KI
King
1 year ago
I think you're right, option A seems to be the correct answer.
BE
Bettina
2 years ago
Hold up, did they say 'wholly equity financed' and then introduce long-term debt? Someone's playing a little fast and loose with the facts here. But hey, I'll go with option B, $0.67 per share, just to keep things interesting.
MA
Martha
1 year ago
I think option B, $0.67 per share, is a good choice. Let's see if that's the correct answer.
JI
Jimmie
1 year ago
I agree, it does seem a bit contradictory to be 'wholly equity financed' and then introduce long-term debt.
DA
Dana
2 years ago
I'm not sure about the answer. Can someone explain how the dividend per share is calculated in this scenario?
MA
Marilynn
2 years ago
Okay, let's break this down. 2 million shares, $5 million profit before interest and tax, 30% corporate income tax, and $2 million in long-term debt at 10% interest. Yup, I think I've got it. Option D, $1.01 per share, is the way to go.
SH
Sheridan
1 year ago
Yes, option D seems to be the correct choice based on the calculations.
OD
Odette
1 year ago
So, we're all in agreement then? Option D it is.
GL
Glenn
1 year ago
That makes sense, considering the data provided.
DO
Dominque
1 year ago
I think it's option D, $1.01 per share.
CA
Catarina
2 years ago
Hmm, let's see. Increase in profit before interest and tax by 10%, and maintain a dividend payout ratio of 40%. Sounds like a pretty solid plan to me. I'm leaning towards option C, $1.11 per share.
EM
Emilio
2 years ago
I agree with Arleen. With a 10% increase in profit, the dividend per share should also increase.
AR
Arleen
2 years ago
I think the answer is C) $1.11 because the company aims to increase profit by 10%.