Specialty Brewer Dividend Payout Ratio and Annual Dividend Calculation | Test Prep

Dividend Payout Ratio and Annual Dividend Calculation for Specialty Brewer

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Question

A financial analyst with Smith, Kleen & Beetchnutty is examining shares of a publicly-traded specialty brewer. Assume the following information:

EPS: $1.83 -

ROE: 19.00%

Growth rate of dividends: 10.85%

Discount rate: 12.50%

Tax Rate 35%

Using this information, what is the dividend payout ratio for this specialty brewer? Further, what is the annual dividend?

Answers

Explanations

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A. B. C. D. E. F.

C

To determine the dividend payout ratio, the equation used to determine the growth rate of dividends must be manipulated. This equation is originally structured as follows:

{g = ROE (1 - Dividend Payout Ratio)}

In order to determine the Dividend Payout Ratio, the equation must be rearranged to the following: {(1 - Dividend Payout Ratio) = Growth Rate of Dividends /

ROE}.

Imputing the given information into this equation will yield:

{(1 - Dividend Payout Ratio) = 0.1085/0.19)} = 0.57105

Finally, subtracting this answer from 1 will yield the answer of 42.90% for the dividend payout ratio. (Remember that the original answer, 0.57105, is the retention rate, not the dividend payout ratio).

In order to determine the annual dividend, take the Dividend Payout Ratio, which was found to be 42.90%, and multiply this figure by the Earnings Per Share calculation, which is given as $1.83. This will yield an annual dividend of $0.785

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