Last year, CPK Inc. had earnings of $4.50 per share and paid a dividend of $0.70. In the current year, the company expects to earn $3.50 per share. The company has a 35% target payout ratio and plans to bring its dividend up to the target payout ratio over a 5-year period. Given the previous payout ratio was 16%, calculate the expected dividend for next year when CPK Inc. is expected to earn $2.50.

$0.4839?

$0.5425 Expected div inc = Exp inc in earnings x target payout ratio x adjustment factor For Current year -1 x 0.35 x (1/5) = -0.07 So dividend in current year = 0.63 For next year -1 x 0.35 x (1/4) = -0.0875 So dividend in next year = 0.5425

0.56?

0.7 but I checked the papers

D0 = .7 Expected EPS Increase = -1 Target Ratio = .35 1/5 years = .2 -1 * .35 * .2 = (.07) .7 - .07 = $0.63 Interesting twist - i believe my above formula works when income is increasing - when income is decreasing, would you reflect a reduction in the dividend?

smileygladhands Wrote: ------------------------------------------------------- > D0 = .7 > > Expected EPS Increase = -1 > > Target Ratio = .35 > > 1/5 years = .2 > > -1 * .35 * .2 = (.07) > > .7 - .07 = $0.63 > > Interesting twist - i believe my above formula > works when income is increasing - when income is > decreasing, would you reflect a reduction in the > dividend? I think the dividend will not change if earnings decrease, that is why this formula is so stupid.

I agree with pfcfaataf Divs will not change if earnings decrease. That way you do not get further from your target payout ratio if earnings see a one time unexpected decline, assuming that earnings will follow a longer term positive growth trend.

I thought target payout ratio was based on paying a given percentage of earnings each year. If that’s the case surely it’s irrelevant if earnings fall or rise as the dividend will fall or rise with earnings.

The wording in this question makes my head spin. Previous Dividend + [(Change in EPS)*(Target Payout Ratio)*(Adjustment Factor)} Is it 0.49?

Hey Damil, could you post the answer?

target payout ratio is just, the ratio of earnings they will pay out. so if they say we will pay out 50% of earnings in dividends the next 5 years, thats the payout regardless of earnings. so if earngins are up, you will get more and if down, div will be less

If a Co. has a target payout ratio of 50% that is NOT necessarily the actual Payout ratio. If earnings go down, the dividend stays the same - unless it is a decline that is not expected to reverse If earnings go up then the change in divs = (change in earnings)*(target ratio)*(1/# of years)

FinNinja Wrote: ------------------------------------------------------- > If a Co. has a target payout ratio of 50% that is > NOT necessarily the actual Payout ratio. > > If earnings go down, the dividend stays the same - > unless it is a decline that is not expected to > reverse > > If earnings go up then the change in divs = > (change in earnings)*(target ratio)*(1/# of years) +1. And there you have your answer, guys.

So it’s $0.56?

Damil, so is the answer 0.70? i.e. since earning declined in both the next quarters, dividend remains same…