--%>
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 : Regarding WACC Regarding the WACC which

    Regarding the WACC which has to be applied to a project, must it be an expected return, the average historical return or an opportunity cost on similar projects?

    		•
  • Q : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures

    		•
  • Q : Long-Term Financing Needed Long-Term

    Long-Term Financing Needed : - At year-end 2012, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25% in 2013. Total ass

    		•
  • Q : Commercial Banking Assignment Part I

    Part I Guidelines and requirements: The questions in Part I of this assignment are based on the materials covered in Units 1 and 2. Please write a short-ess

    		•
  • Q : Is the given affirmation of an

    Is the given affirmation of an accountancy expert true? “There valuation criterion that reflects the value of the shares of a company in the most accurate way is based on the amount of the equity of shareholder of its balance sheet. Stating that the value of sha

    		•
  • Q : Types of lease contracts What are the

    What are the types of lease contracts which are seen in practice?

    		•
  • Q : Problem on leveraged beta AB

    AB Restaurants has debt/equity ratio .25, and its leveraged beta is 1.5. Its tax rate is 30%, and its cost of equity is 15%. The risk-free rate is 5%. CD Restaurants has debt/equity ratio .4, and tax rate 35%. Find the cost of equity for CD.

    		•
  • Q : What is Box Spread Box Spread: This is

    Box Spread: This is another strategy which seeks to exploit the arbitrage opportunities which are available in the market. In case that the options are correctly priced, this strategy would earn only the risk free rate. However, due to existence of im

    		•
  • Q : Define Strong form market efficiency

    Strong form market efficiency: Strong form market efficiency defines that the price of a security in the market replicates all information—public and also private or within information. Strong form efficiency

    		•
  • Q : Is it possible to use a constant WACC

    Is this possible to use a constant WACC in the valuation of a company along with a changing debt?

    		•