--%>
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 : Calculating Super normal profit The

    The case study of an economic analysis is done for Schlumberger, oilfield Service Company.  They are No. 1 in terms of market caps, revenue and employees globally. When any references are used/outside sources (except for Schlumberger's annual reports and financia

    		•
  • Q : What is the market risk premium What is

    What is the market risk premium within Spain at the present time – the number that I have to use in the valuations?

    		•
  • Q : Problem on binomial option pricing model

    The share price of Cheung Kong (Holdings) Limited is currently at $100. Over each of the next two three-month periods, you expect its price will either increase by 10% or fall by 10% in each three-month period. If the Hong Kong interbank offered rate is 8% per annum w

    		•
  • Q : Calculate a positive net income for a

    Is this possible for a company with a positive net income and that does not distribute dividends to get itself in suspension of payments?

    		•
  • Q : Explain Financial Management Financial

    Financial Management: It means organizing, planning, directing and controlling the financial activities like procurement and use of funds of enterprise. This means exerting general management principles to the financial resources of enterprise. <

    		•
  • Q : Define Economy Impacts Economy Impacts

    Economy Impacts: An upcoming economy is indicated by rise in stock market, as stock market is primary indicator of a economic strength of a country. Progressing economy results in market boom. Yield of companies’ increases on improving economy,

    		•
  • Q : Problem on Zero coupon bonds

    Robertsons, Inc. is planning to enlarge its specialty stores into 5 other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. When your opportunity cost is 8 % and similar coupon-bearing bonds will recompense semi-annuall

    		•
  • Q : Explain the definition of WACC An

    An investment bank computed my WACC. The report is as: “the definition of the WACC is defined as WACC = RF + βu (RM – RF); here RF being the risk-free rate and βu the unleveraged beta and RM the market risk rate.” It is differ from what we

    		•
  • Q : Purchaing or leasing problem Crawford

    Crawford Corporation is planning to lease a machine for the next 4 years for an annual lease payment of $3,000 paid in advance, plus a non-refundable initial fee of $3,000. There is a 1-year delay for the tax benefits of leasing. Crawford may buy the machine, deprecia

    		•
  • Q : What is the Capital Cash Flow What is

    What is the Capital Cash Flow?

    		•