13-1. (Dividend policies) Final earnings estimates for Chilean Health Spa & Fitn

Question

13-1. (Dividend policies) Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table. The firm has 7,500,000 shares of common stock outstanding. As assistant to the CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible policies: a. A stable dollar dividend targeted at 40 percent of earnings over a 5-year period b. A small, regular dividend of $0.60 per share plus a year-end extra when the profits in any year exceed $20,000,000. The year-end extra dividend will equal 50 percent of profits exceeding $20,000,000. c. A constant dividend payout ratio of 40 percent YEAR PROFITS AFTER TAXES 1$ 18,000,000 2 21,000,000 3 19,000,000 4 23,000,000 5 25,000,00 13-2. (Flotation costs and issue size) Your firm needs to raise $10 million. Assuming that flotation costs are expected to be $15 per share, and that the market price of the stock is $120, how many shares would have to be issued? What is the dollar size of the issue?

Explanation / Answer

A. 40 (18+21+19+23+25)= 42.4/5= 8.48
8.48/7.5= $1.13 per share

B. 1. .60
2. .60 +.5/7.5= $0.67 per share
3. .60
4. .60 +1.5/7.5= $.80 per share
5. .60 +2.5/7.5= $0.93 per share

C 18*.4/7.5= $0.96 per share
21*.4/7.5= $1.12 per share
19*.4/7.5= $1.01 per share
23*.4/7.5= $1.23 per share
25*.4/7.5= $1.33 per share

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