The Sharpe Co. just paid a dividend of $1.40 per share of stock. Its target payo

Question

The Sharpe Co. just paid a dividend of $1.40 per share of stock. Its target payout ratio is 40 percent. The company expects to have an earnings per share of $4.95 one year from now.

If the adjustment rate is .5 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 .8 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).)

The Sharpe Co. just paid a dividend of $1.40 per share of stock. Its target payout ratio is 40 percent. The company expects to have an earnings per share of $4.95 one year from now.

Explanation / Answer

Dividend for current year as per lintner = Adjustment rate*target payout ratio*EPS of current year + (1 - adjustment rate)*Dividend per share of last year

a. Dividend one year from now = 0.5*0.4*4.95 + (1 - 0.5)*1.4 = $1.69

b. Dividend one year from now = 0.8*0.4*4.95 + (1 - 0.8)*1.4 = $1.87

c. 0.5 rate is more conservative since it has lower value.

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