--%>
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 : What is the expected risk premium on

    You have decided to invest 30 percent in X; 30 percent in Y; and 40 percent in Z. Theprobability of the state of the economy is Boom 25%; Normal 60%; and, Bust 15%. The rateof return for stock X is Boom .20; Normal .15; and, Bust .00. The rate of return for stock Y is

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Determine the future value What would

    What would the future value after 5 years of $100 be at 10% compound interest?

    		•
  • Q : An example of use beta of Kinepolis in

    A financial consultant is valuing the company I set as an objective (an entertainment centre) by discounting the cash flows until the end of the dealership at 7.26% (interest rate on 30-year-bonds = 5.1%; market premium = 5%, and Beta = 0.47%). 0.47 is a beta provided

    		•
  • Q : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

    		•
  • Q : Valuation & Merger analysis Problem

    Problem 21-1 Valuation Harrison Corporation is interested in acquiring Van Buren Corporation. Assume t

    		•
  • Q : Is depreciation is the loss of value of

    Is the depreciation is the loss of value of fixed assets?

    		•
  • Q : Do expected equity flows coincide with

    Do expected equity flows coincide along with expected dividends?

    		•
  • Q : State Transition Management Transition

    Transition Management: It is a financial service accessible to institutional investors who require making significant modifications to their portfolios, like merging, selling, or substantially restructuring them. This procedure can expose investors to

    		•
  • Q : Briefly describe the financial services

    1 FINANCIAL SERVICES BY BANKS Financial system facilitates the transformation of savings of individuals, government as well as business into investment and consumption. It consists of

    		•