 # Equity Question

How do you calculate dividend per share based on a residual income approach? The data provided is Current share price 40 Shares oustanding 56250000 Estimated 2006 Earnings 112.5 million Planned capital spending 150 million Target debt tp equity ratio 1 to 1 Cost of equity: 8% Constant growth rate 5.2% question: The dividend per share based on a residual dividend approach is closest to: a) 0.00 b) 0.22 c) 0.67 d) 1.11 Please help.

C)

“Target debt tp equity ratio 1 to 1” means that they’re financed 50% debt and 50% equity. So, 50% of the “Planned capital spending 150 million” will be based on equity (as in internally raised equity => retained earnings) 150 X 0.5 = 75 Dividends = What’s left after the internally raised equity: 112.5 - 75 = 37.5 On a per share basis: 37.5 / 56.25 = 0.66666 56.25 being the # of share outstanding in million

hi, can you please explain. I am not sure how to derive that answer.

thanks so much.

pagra Wrote: ------------------------------------------------------- > hi, can you please explain. I am not sure how to > derive that answer. I’m really not sure that I could. I’t one of these things, I just close my eyes and let chance pick an answer for me. My astrologyst told me that it should work on the exam.

yup. that’s what i get as well. olivier beat me to it.

NetIncome = 112.5 portion of capital spending funded from equity 150/2 = 75 Residual income = 112.5 - 75 = 37.5 Divident per share = 37.5 mil/56.2mil = 0.67 -> C

pagra Wrote: ------------------------------------------------------- > How do you calculate dividend per share based on a > residual income approach? Don’t mix up residual dividend approach (pay out what is left after investment) with residual income valuation method (excess return over cost of capital). They are very different beasts, even if they do share a word.

I always get the two mixed up…christmaths do you have a good way of differentiating the two?

Remembering.

I have much to learn as a young grasshopper…

chrismaths Wrote: ------------------------------------------------------- > Remembering. I forget how to do that…

interestingly enuff 40 = D/r-g EPS = 2 2*P/E = 40 P/E = 20 20 = D/E/r-g D/E = .56 D = 1.12 aka D

aladak -wouldnt the use of the D/r-g be predicated on a stable dividend growth assumption?. doesnt hold for residual dividends method. its like dividing by 0. not doable