a) Applet Equipment had the following equity accounts at the end of 2010: Common
ID: 2745551 • Letter: A
Question
a) Applet Equipment had the following equity accounts at the end of 2010:
Common stock ($1 par) $ 300,000
Capital surplus $ 600,000
Retained earnings $ 240,000
Total Shareholders’ Equity $1,140,000
a) Applet earned net income of $150,000 in 2011 and announced that it would pay a .25/share cash dividend. Calculate the book value per share at the end of 2011.
b) Gordon Disk Company expects to have net income of $250,000 during the next year. Its target, and current, capital structure is 25% debt and 75% common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $150,000. If Gordon uses the residual dividend model to determine next year’s dividend payout, what is the expected payout ratio?
Explanation / Answer
a. Outstanding Shares = $300,000/ $1 = 300,000
Total Shareholders' Equity (2010) = $1,140,000 => Book Value per share (BVPS) (2010) = 1140/300 = $3.8
Earnings per share (EPS) (2011) = $150,000/$300,000 = $0.50 Dividend per share = $0.25
BVPS (2011) = BVPS (2010) + EPS(2011) - Dividend per share (2011) = $3.8 + $0.50 - $0.25 = $4.05
b. Net Income = $250,000
Capital Budget Required = $150,000; Capital Structure = 75% Equity => Equity Required = 0.75 x $150,000 = $112,500
Residual Dividend = $250,000 - $112,500 = $137,500
Expected Payout Ratio = 137.5/250 = 55%
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