Dividend Payout

CFA Level II
#1
  1. Last year, Wolverine Shoes and Boots had earnings of $4.00 per share and paid a dividend of $0.20. In the current year, the company expects to earn $4.40 per share. The company has a 30% target payout ratio and plans to bring its dividend up to the target payout ratio over an 8-year period. Next year’s expected dividend is closest to: A. $0.212. B. $0.215. C. $0.235. The expected dividend is computed as $0.20 + [$0.40 × 0.30 × (1/8)] = $0.20 + $0.015 = $0.215.

I have two questions:

1.what is the 0.2( is it the dividends of the current year, is so why do we include it)

2.what is the 0.4?

#2

.2 is the current dividend.

.4 is the increase in EPS. You’re trying to figure out the next year’s dividend. This will include this year’s dividend (.2), plus the increase needed to get the payout ratio to 30% over 8 years (.4 X .3 X 1/8).

#3

Thanks!