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DIVIDENDS Bowles Sporting Inc. is prepared to report the following 2015 income statement (shown in thousands of dollars). Sales $15,200 Operating costs including depreciation 11,900 EBIT $ 3,300 Interest 300 EBT $ 3,000 Taxes (40%) 1,200 Net income $ 1,800 Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of common stock outstanding, and its stock trades at $48 per share. a. The company had a 40% dividend payout ratio in 2014. If Bowles wants to maintain this payout ratio in 2015, what will be its per-share dividend in 2015? b. If the company maintains this 40% payout ratio, what will be the current dividend yield on the company’s stock? c. The company reported net income of $1 5 million in 2014. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2014? d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2015 that it paid in 2014. If it chooses this policy, what will be the company’s dividend payout ratio in 2015? 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 transactions 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.

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 15, Problem 7P
Textbook Problem

DIVIDENDS Bowles Sporting Inc. is prepared to report the following 2015 income statement (shown in thousands of dollars).

Sales $15,200
Operating costs including depreciation 11,900
EBIT $ 3,300
Interest 300
EBT $ 3,000
Taxes (40%) 1,200
Net income $ 1,800

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of common stock outstanding, and its stock trades at $48 per share.

  1. a. The company had a 40% dividend payout ratio in 2014. If Bowles wants to maintain this payout ratio in 2015, what will be its per-share dividend in 2015?
  2. b. If the company maintains this 40% payout ratio, what will be the current dividend yield on the company’s stock?
  3. c. The company reported net income of $1 5 million in 2014. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2014?
  4. d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2015 that it paid in 2014. If it chooses this policy, what will be the company’s dividend payout ratio in 2015?
  5. 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 transactions 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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