--%>
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 : Walt disney WAAC You work in Walt

    You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team meeting later today....?

    		•
  • Q : Explain the branching structure of the

    Explain the branching structure of the binomial model.

    		•
  • Q : Is book value the excellent proxy to

    Is book value the excellent proxy to the value of the shares?

    		•
  • Q : What is the required rate of return on

    Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 9% a year. What st

    		•
  • Q : Explain accurately value bond options

    If the model could not even find bond prices right, how could this hope to accurately value bond options?

    		•
  • Q : Explain valuation method for

    We were assigned a valuation of a pharmaceutical laboratory’ shares. Which valuation method is further convenient?

    		•
  • Q : Which currency is utilized in an

    Which currency has to be utilized in an international acquisition in order to compute the flows?

    		•
  • Q : Why required return cannot computed by

    Why can we not compute the required return (Ke) by the Gordon-Shapiro model [P0 = Div0 (1+g) / (Ke – g)] in place of using the CAPM? As we identify the current dividend (Div0) and the current share price (P0), we can acquire the growth rate of the dividend by th

    		•
  • Q : Problem on annual mortgage payment You

    You just took out a variable-rate mortgage on your new home. The mortgage value is $100,000, the term is 30 years, and initially the interest rate is 8%. The interest rate is fixed for 5 years, after which the time rate will be adjusted according to the prevailing rat

    		•
  • Q : Define reasonable things that a company

    There are four methods a company can utilize the money this generates: a) Buying other assets or companies; b) Reducing debt of it; c) Distribute this to shareholders, and d) Increasing cash holdings of it.