--%>
Assignment Help - homework help

Probability of dividend

Universal Corporation has the following dividend policy: if the earnings after taxes are less than $1 million, the dividend payout ratio will be 35%, but if these earnings are over $1 million, the dividend payout ratio will be 45%. The EBIT of Universal for next year is expected to be $10 million with a standard deviation of $4 million. Universal has $30 million in long-term bonds with coupon of 9%, and 1.5 million shares of common stock. Calculate the probability that Universal will give a dividend of more than $1 per share. The tax rate of Universal is 30%.

E

Expert

Verified

From the given details,

163_73.71.jpg

Since earnings after taxes are well above $1 million, the dividend payout ratio will be 45%. Hence if a dividend of $1/share is given, the EPS will be

0.45 = 1/EPS
EPS = 1/0.45 = 2.22

Hence profit after taxes = 2.22*1.5 million = 3.33 million

Profit before taxes = 4.76 million
EBIT = $7.462 million

In order to determine the probability,

Z = (7.462 – 10)/4 = -0.635
P(z) = 73.71%

Thus the probability that Universal will give a dividend of more than $1 per share is 73.71%.

   Related Questions in Corporate Finance

  • Q : Public Finance which type of tax,

    which type of tax, direct or indirect is applicable in underdeveloped countries? Why? Show your critical areas and weaknesses.

    		•
  • Q : Why do a Split Why do a Split?

    Why do a Split?

    		•
  • Q : Define Capital Projects Capital

    Capital Projects: It is a long-term investment made in order to build on, add or enhance on a capital-intensive project. A capital project is any undertaking that requires the usage of notable amounts of capital, together with financial and labor, to

    		•
  • Q : Case Study 2 You have joined Zurich

    You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm

    		•
  • Q : What is Stock Market Stock Market : To

    Stock Market: To trade company shares (or stock) and derivatives, a stock market or equity market is public entity where these shares and derivatives are sold at agreed price. These are to be listed on a stock exchange in order to trade publicly.

    		•
  • Q : What is real gross domestic product

    Real gross domestic product: If GDP of a particular year is estimated or evaluated on the basis of the base year prices it is termed as real gross domestic product.

    		•
  • Q : What repercussions do variations in

    What repercussions do variations in the oil price have on the value of a company?

    		•
  • Q : Is the market risk premium a parameter

    Is the market risk premium a parameter, for the world economy or for the national economy?

    		•
  • Q : Does value of the company increase when

    According to the valuation method depends on tax shields, the value of the company (Vl) is the value of the unleveraged company (Vu) in addition with the value of tax shields (VTS), thus, the higher the interest and the higher the VTS. Therefore, does

    		•
  • Q : Illustrates financial consultant has

    A financial consultant obtains various valuations of my company when this discounts the Free Cash Flow (FCF) as opposed to when this uses the Equity Cash Flow. Is it correct?

    		•