Brooks Sporting Inc. is prepared to report the following 2018 income statement
(shown in thousands of dollars).
Prior to reporting this income statement, the company wants to determine its annual dividend.
The company has 320,000 shares of common stock outstanding, and its stock trades
at $37 per share.
a. The company had a 25% dividend payout ratio in 2017. If Brooks wants to maintain
this payout ratio in 2018, what will be its per-share dividend in 2018?
b. If the company maintains this 25% payout ratio, what will be the current dividend
yield on the company’s stock?
c. The company reported net income of $1.35 million in 2017. Assume that the number
of shares outstanding has remained constant. What was the company’s per-share dividend
in 2017?
d. As an alternative to maintaining the same dividend payout ratio, Brooks is considering
maintaining the same per-share dividend in 2018 that it paid in 2017. If it chooses
this policy, what will be the company’s dividend payout ratio in 2018?
e. Assume that the company is interested in dramatically expanding its operations and
that this expansion will require significant amounts of capital. The company would
like to avoid transaction costs involved in issuing new equity. Given this scenario,
would it make more sense for the company to maintain a constant dividend payout
ratio or to maintain the same per-share dividend? Explain.
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