Bowles Sporting Inc. is prepared to report the following 2014 income statement (

Question

Bowles Sporting Inc. is prepared to report the following 2014 income statement (shown in thousands of dollars).

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 550,000 shares of stock outstanding, and its stock trades at $49 per share.

a.) The company had a 35% dividend payout ratio in 2013. If Bowles wants to maintain this payout ratio in 2014, what will be its per-share dividend in 2014? Round your answer to the nearest cent.

b.) If the company maintains this 35% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places.

c.) The company reported net income of $3.1 million in 2013. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2013? Round your answer to the nearest cent.

d.) As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2014 that it paid in 2013. If it chooses this policy, what will be the company's dividend payout ratio in 2014? Round your answer to two decimal places.

Explanation / Answer

Answer:

a) Calculation of Dividend Per Share in 2014

Earnings Per Share = Net Income / No. of Equity Share = $3,225,000 / 550,000 = $5.86

Dividend Per Share = Earnings Per Share x Dividend Payout Ratio = $5.86 x 35% = $2.05

b) Current Dividend Yield if company maintain 35% payout ratio

Dividend Yield = Dividend Per Share / Current Market Price of Share x 100 = $2.05 / $49 x 100 = 4.18%

C) Dividend Per Share in 2013 (If company reported net income of $3.1 million in 2013 & number of shares outstanding has remained constant)

Earnings Per Share = Net Income / No. of Equity Share = $3,100,000 / 550,000 = $5.64

Dividend Per Share = Earnings Per Share x Dividend Payout Ratio = $5.64 x 35% = $1.974

D) Dividend Payout Ratio in 2014 (If Bowles is considering maintaining the same per share dividend in 2014 that it paid in 2013)

Dividend Per Share (2013) = $1.974 (as calculated above)

Dividend Per Share (2014) = $1.974 (as Bowles is considering maintaining same dividend per share)

So, Dividend Payout Ratio (2014) = Dividend Per Share / Earnings Per Share x 100

Dividend Payout Ratio (2014) = $1.974 / $5.86 x 100 = 33.686% or 33.69%

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