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% 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) 4 years. C) 6 years. D) 8 years.

b - .36/4 = .09

4 years ???

dirtydirty Wrote: ------------------------------------------------------- > b - .36/4 = .09 where did .36 come from?

.39 = .30 + (1.2*.3*1/x) B

0.3 + 1/n(0.3)(1.2) = 0.39 solving for n = 4 years i cant believe i cld get tht formula out of mind !!! i hopeeee it is right

1.2 change in eps * .3

again good work team. these are the dumb little formulas that if you know on test day, this question takes 20 seconds and whamo you’re done. if you can’t remember the formula, this might get awkward. Your answer: B was correct! 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

ugh

I was able to figure it out by working backwards…however I couldn’t remember the exact formula…i just knew it enough to get the right answer…not the best thing going into the exam

bannisja Wrote: ------------------------------------------------------- > again good work team. these are the dumb little > formulas that if you know on test day, this > question takes 20 seconds and whamo you’re done. > if you can’t remember the formula, this might get > awkward. > > Your answer: B was correct! > > 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 WHAT the mother f*ck is this formula…adjustment factor, say whaaaa?

LOL, there are few things more irritating than drawing a blank mental card when you go to see a questions.

Holy f*ck, I should probably learn this. Pink just told me this in equity?

Its like 3 lines in equity, which means we’ll get two vinnettes on it.

zim, you dont even have to remember the ugly formula to get this right. So the new dividend is the old one plus some increment. Now they need to get cash from somewhere, so think increase in EPS…but they’re not gonna pay it all out - so multiply the increase in EPS by the target payout ratio to get the % of the excess cash they’re gonna distribute to shareholders. To cap it off, think PER YEAR effect, so divide all that by the # of years this is happening over (aka adjustment factor) and you’re done

zimmy- it’s a pretty small formula- it’d maybe just maybe be 1 point on the test if that, but if i remember correctly, mock 1 CFA test had it there so you never know. i’ve been doing fsa/corp fi all night so maybe it’s there? this came in a all FSA qbank test. most q’s i’ve seen give you the # of years and you find the next div: Expected dividend = (previous dividend) + [(expected increase in EPS) × (target payout ratio) × (1/# years)]

lola - I will never ever need to remember that crappy formula after reading what you have written.

For me this is still kind of strange:

In the previous year the dividend payout ratio was 0.3/4=7.5%

This year it is expected to be 0.39/5.2=7.5%

**How does this prove that in 4 years the company will reach the 30% payout ratio???**

The same forumla appears in Corporate finance too… In the divends and share repo chapter

What is the logic behind this? The payout for the current year is 7.5% while the target payout is 30%… so it is just assumed the company will increase it 7.5% a year until it reaches the target payout? That seems like really shaky reasoning.

*Oh I just now see this thread is from 2008… nevermind.