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

Question

Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2016.
Sales $15,300
Operating costs including depreciation 12,240
EBIT $3,060
Interest 330
EBT $2730
Taxes (40%) 1,092
Net income $1,638

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 320,000 shares of stock outstanding, and its stock trades at $37 per share.

a. The company had a 25% dividend payout ratio in 2015. If Bowles wants to maintain this payout ratio in 2016, what will be its per-share dividend in 2016?

b. If the company maintains this 25% payout ratio, what will be the current dividend yield on the company's stock?

c. The company reported net income of $1.35 million in 2015. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2015?

d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2016 that it paid in 2015. If it chooses this policy, what will be the company's dividend payout ratio in 2016?

e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or maintain the same per-share dividend?

Please show all work. Thanks!!

Explanation / Answer

a)

Dividend payout ratio in 2016 = 25%

EPS in 2016 = 1,638,000/320,000= 5.118

DPS in 2016 = 25% * 5.118 = $ 1.279

b)

Dividend yield = Annual Dividend/ Stock Price = 1.279/37 = 3.45 %

c)

EPS in 2015 = 1,350,000/320,000 = $ 4.218

DPS in 2015 = 0.25 * 4.218 = $1.054

d)

DPS in 2016 = $ 1.054

Dividend payout ratio in 2016 = 1.054/5.118 = 20.59 %

e)

As the company is expected to expand its operations with significant amounts of capital, without issuing new equity,it favors using retained earnings . As such, if it has to have a high retention ratio. This means the dividend payout ratio must be lower. So it makes more sense for the company to maintain the same per share dividend.

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