1.Lazenby Home Builders has a target dividend payout ratio of 25 percent. Last year, Lazenby earned $2.00 per share and paid a dividend of $0.25. This year, new home starts are expected to decline significantly and Lazenby expects to earnings to decline to $1.80 per share. Which of the following scenarios is least likely? Lazenby Home Builders:

A)   maintains its dividend at $0.25 per share.

B)   increases its dividend by 50%.

C)   cuts its dividend by 10%.

D)   Increases its dividend by $0.10 per share.

2.Rombauer Metals uses a target payout adjustment approach in paying its annual dividend. Last year, Rombauer had earnings per share (EPS) of $0.60 and paid a dividend of $0.08 per share. This year, Rombauer estimates its EPS will be $0.90. What is Rombauer’s expected dividend per share if the firm has a target payout ratio of 40 percent and uses a 4 year period to adjust its dividend?

A)   $0.15.

B)   $0.09.

C)   $0.28.

D)   $0.11.

3.Manthey Studios uses a target payout adjustment approach in paying its annual dividend. Last year, Manthey had earnings per share (EPS) of $2.50 and paid a dividend of $0.30 per share. This year, Manthey estimates its EPS will be $3.20. Manthey has a target payout ratio of 28 percent and uses a 5 year period to adjust its dividend. Which of the following is closest to Manthey’s expected dividend per share?

A)   $0.42.

B)   $0.34.

C)   $0.59.

D)   $0.70.

4.Last year, Calfee Multimedia had earnings of $4.00 per share and paid a dividend of $0.30. In the current year, the company expects to earn $5.20 per share. Calfee has a 30 percent target payout ratio. If the expected dividend for this year is $0.39, what time period is Calfee most likely using in order to bring its dividend up to the target payout?

A)   3 years.

B)   6 years.

C)   4 years.

D)   8 years.

1.Lazenby Home Builders has a target dividend payout ratio of 25 percent. Last year, Lazenby earned $2.00 per share and paid a dividend of $0.25. This year, new home starts are expected to decline significantly and Lazenby expects to earnings to decline to $1.80 per share. Which of the following scenarios is least likely? Lazenby Home Builders:

A)   maintains its dividend at $0.25 per share.

B)   increases its dividend by 50%.

C)   cuts its dividend by 10%.

D)   Increases its dividend by $0.10 per share.

Click for Answer and Explanation C)

Despite falling earnings, a company will be reluctant to cut its dividend. With a target payout ratio of 25 percent, earnings per share of $1.80 would call for a dividend of $0.45. Even a dividend increase of $0.10 or an increase of 50 percent over the prior year’s dividend would still put the dividend below the target payout.

2.Rombauer Metals uses a target payout adjustment approach in paying its annual dividend. Last year, Rombauer had earnings per share (EPS) of $0.60 and paid a dividend of $0.08 per share. This year, Rombauer estimates its EPS will be $0.90. What is Rombauer’s expected dividend per share if the firm has a target payout ratio of 40 percent and uses a 4 year period to adjust its dividend?

A)   $0.15.

B)   $0.09.

C)   $0.28.

D)   $0.11.

Click for Answer and Explanation D)

Expected dividend = $0.08 + [($0.90 - $0.60) × 0.40 × (1/4)]

Expected dividend = $0.08 + $0.03 = $0.11

3.Manthey Studios uses a target payout adjustment approach in paying its annual dividend. Last year, Manthey had earnings per share (EPS) of $2.50 and paid a dividend of $0.30 per share. This year, Manthey estimates its EPS will be $3.20. Manthey has a target payout ratio of 28 percent and uses a 5 year period to adjust its dividend. Which of the following is closest to Manthey’s expected dividend per share?

A)   $0.42.

B)   $0.34.

C)   $0.59.

D)   $0.70.

Click for Answer and Explanation B)

Expected dividend = $0.30 + [($3.20 - $2.50) × 0.28 × (1/5)]

Expected dividend = $0.30 + $0.0392 = $0.3392 ≈ $0.34

4.Last year, Calfee Multimedia had earnings of $4.00 per share and paid a dividend of $0.30. In the current year, the company expects to earn $5.20 per share. Calfee has a 30 percent target payout ratio. If the expected dividend for this year is $0.39, what time period is Calfee most likely using in order to bring its dividend up to the target payout?

A)   3 years.

B)   6 years.

C)   4 years.

D)   8 years.

Click for Answer and Explanation C)

The formula to determine the expected dividend in a target payout approach is:

Expected dividend = (previous dividend) + [(expected increase in EPS) × (target payout ratio) × (adjustment factor)], where the adjustment factor is 1/number of years over which the adjustment will take place.

Using the numbers given:

$0.39 = $0.30 + [($5.20 - $4.00) × (0.30) × (1/n)]
$0.39 = $0.30 + [($1.20) × (0.30) × (1/n)]
$0.09 = $0.36 × (1/n)
0.25 = (1/n)
n = 4