Overton Incorporated is prepared to report the following incomestateme

QUESTION

Overton Incorporated is prepared to report the following incomestatement(shown in thousands of dollars) for the year 2006. Sales &nbsp
All figures are in ‘000 a. The company had a 40 percent dividend payout ratio in 2005. IfOverton wants to maintain this payout ratio in 2006, whatwill be its per-share dividend in 2006? Ans. Dividend payout ratio = Dividend/Net Income So Dividend amt paid = 40% of Net Inc = 0.40*1800 = $720 As there are 500 shares, Dividend per share = 720/500 = $1.44 pershare in 2006 b. If the company maintains this 40 percent payout ratio, what willbe the current dividend yield on the companys stock? Ans. Dividend Yield = D1/Po where D1 is Div per share & Po isShare price. So Div Yield = 1.44/48 = 3% c. The company reported net income of $1.5 million in 2005. Assumethat the number of shares outstanding has remained constant.What was the companys per-share dividend in 2005? Ans. Using the same method as in ‘a above, Per share div in 2005is $1.20 per share d. As an alternative to maintaining the same dividend payout ratio,Overton is considering maintaining the same per-sharedividend in 2006 that it paid in 2005. If it chooses this policy,what will be the companys dividend payout ratio in 2006? Ans. Div per share in 2006 wil be $1.20 per share. Total Amt paidas div

ill be 1.20*500= $600. So Div payout ratio = 600/1800= 33.33% e. Assume that the company is interested in dramatically expandingits operations and that this expansion will require significantamounts of capital. The company would like to avoid transactionscosts involved in issuing new equity. Given this scenario, would itmake more sense for the company to maintain a constant dividendpayout ratio or to maintain the same per-share dividend? As can be seen from ‘d above, If Div per share is maintainedat 2005 levels, The net Inc post dividen will be 1800-600 =1200. See from ‘a above, If Div payout ratio of 40% is maintained, NetInc will be 1800-720 = 1080. Thus it is clear that it make more sense for the company tomaintain the same per-share dividend of $1.20 per share in 2006

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