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# Dividends

Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2009.
Sales \$15,200
Operating costs including depreciation 11,900
EBIT \$3,300
Interest 300
EBT \$3,000
Taxes (40%) 1,200
Net income \$1,800
Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 500,000 shares of stock outstanding, and its stock trades at \$48 per share.

a. The company had a 40% dividend payout ratio in 2008. If Bowles wants to maintain this payout ratio in 2009, what will be its per-share dividend in 2009?

b. If the company maintains this 40% payout ratio, what will be the current dividend yield on the company's stock?

c. The company reported net income of \$1.5 million in 2008. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2008?

d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2009 that it paid in 2008. If it chooses this policy, what will be the company's dividend payout ratio in 2009?

e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or maintain the same per-share dividend?

#### Solution Preview

a. The total dividends paid out in 2009 = 1,800,000X40%=\$720,000
Number of shares = 500,000
Dividend per share = 720,000/500,000 = \$1.44

b. Dividend yield = Dividend per share/Price
= 1.44/48 = 3%

c. The dividend ...

#### Solution Summary

The solution explains some questions relating to dividends

\$2.19