A firm uses a target payout ratio of 0.49. In recent years, its earnings per share (EPS) has been $4.22 and using that EPS, it has just paid its annual dividend of $2.07 per share. One year from now, the firm expects its EPS to increase to $4.97 but does not believe that the entire increase in its earnings is permanent. It intends to select its dividend amount according to the Lintner model, using a speed of adjustment coefficient of 0.62. Question content area bottom Part 1 Part A: What dividend will the firm issue in one year?Dividend in one year: $enter your response here per share. (Enter your answer rounded to two decimal places and use the rounded value in Part B).Part B: If the EPS remains at its higher value for an additional year, what dividend will the firm issue in two years?Dividend in two years: $enter your response here per share.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A firm uses a target payout ratio of
0.49.
In recent years, its earnings per share (EPS) has been
$4.22
and using that EPS, it has just paid its annual dividend of
$2.07
per share. One year from now, the firm expects its EPS to increase to
$4.97
but does not believe that the entire increase in its earnings is permanent. It intends to select its dividend amount according to the Lintner model, using a speed of adjustment coefficient of
0.62.
Question content area bottom
Part 1
Part
A:
What dividend will the firm issue in one year?Dividend in one year:
$enter your response here
per share. (Enter your answer rounded to two decimal places and use the rounded value in Part B).Part
B:
If the EPS remains at its higher value for an additional year, what dividend will the firm issue in two years?Dividend in two years:
$enter your response here
per share. (Enter your answer rounded to two decimal places).
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