The Sharpe Co. just paid a dividend of $1.60 per share of stock. Its target payo

Question

The Sharpe Co. just paid a dividend of $1.60 per share of stock. Its target payout ratio is 40 percent. The company expects to have an earnings per share of $4.96 one year from now.

If the adjustment rate is .6 as defined in the Lintner model, what is the dividend one year from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

If the adjustment rate is .9 instead, what is the dividend one year from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

If the adjustment rate is .6 as defined in the Lintner model, what is the dividend one year from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

We know that the Lintner dividend model is given by D1 = a(p E1) + (1 a)D0, where, in this case, p = 0.4, E1 = 4.96, and D0 = 1.6.

a) If a = 0.6, we have D1 = 0.6(0.4 × 4.96) + (1 0.6)1.6 = 1.8304

(b) If a = 0.9, we have D1 = 0.9(0.4 × 4.96) + (1 0.9)1.6 = 1.9456

Notice that the increase in the dividend is more conservative in part (a) since the adjustment rate is lower (i.e., more weight is put on last year’s dividend).

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