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Chapter 18: Problems A10 & B2 (P. 542)

934 words - 4 pages

Chapter 18: Problems A10 & B2 (p. 542)
Regional Software’s estimated dividends per share for next year and the next four based on Lintner’s dividend adjustment model are:

DPS1 – DPS0 = ADJ* [POR*EPS1 – DPS0]

DPS1 – 1 = 0.75* [0.25*8 – 1]

DPS1 = 0.75* [0.25*8 – 1] + 1

DPS1 = 1.75 ===> year 1 DPS

DPS2 – DPS1 = ADJ* [POR*EPS2 – DPS1]

DPS2 – 1.75 = 0.75* [0.25*8 – 1.75]

DPS2 =1.94 ===> year 2 DPS

DPS3 –DPS2 = ADJ* [POR*EPS3 – DPS2]

DPS3 – 1.94 = 0.75* [0.25*8 – 1.94]

DPS3 =1.99 ===> year 3 DPS

DPS4 –DPS3 = ADJ* [POR*EPS4 – DPS3]

DPS4 – 1.99 = 0.75* ...view middle of the document...

Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?

Rating Category Fixed Charge Coverage Funds From Operations/Total Debt Long-Term/Capitalization

Aa 4.00-5.25x 60-80% 17-23%

A 3.00-4.30 45-65 22-32

Baa 1.95-3.40 35-55 30-41

Chapter 18: Problems A10 & B2 (p. 542)

(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

-2-er share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), calculate projected dividends per share for this year and the next four.

B2. (Dividend policy) A firm has 20 million common shares outstanding. It currency pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.

a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?

b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.

1 2 3 4 5 Thereafter

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