The Borowiak Rose Water Company expects with some degree of certainty to generate the following net income
and to have
the following capital expenditures during the next five years (in thousands of dollars):
Year
- 1 2 3
Net Income 2000 1500 2500
Capital Expenditure 1000 1500 2000
The company currently has 1 million shares of common stock outstanding and pays annual dividends of $1 per share.
a. Determine dividends per share and external financing required in each year if dividend policy is treated as a residual
decision.
b. Determine the amounts of external financing that will be necessary in each year if the present annual dividend per share is
maintained.
c. Determine dividends per share and the amounts of external financing that will be necessary if a dividend-payout ratio of
50 percent is maintained.
d. Under which of the three dividend policies are aggregate dividends (total dividends over five years) maximized? External
required financing (total financing over five years) minimized?
ollowing net income and to have
4 5
2300 1800
1500 2000
ividends of $1 per share.
icy is treated as a residual
sent annual dividend per share is
ry if a dividend-payout ratio of
ve years) maximized? External
A. Dividend policy treated as a residual decision:
Under this policy, the company will first fund its capital expenditures and then distribute t
remaining earnings as dividends. The dividends per share and external financing required in
year will be:
Year
- 1 2 3 4
Income 2000 1500 2500 2300
Cap ex 1000 1500 2000 1500
Surplus/(deficit) 1000 0 500 800
Dividend paid last year 1000 1000 1000 1000
Dividend per share 1 0 0.5 0.8
External borrowings 0 0 0 0
Dividend of this year 1000 0 500 800
Total Dividend 2300
B. Present annual dividend per share is maintained:
Under this policy, the company will maintain the current dividend per share of $1 and fund
capital expenditures and any shortfall in earnings with external financing. The amounts o
external financing required in each year will be:
Year
- 1 2 3 4
Income 2000 1500 2500 2300
Cap ex 1000 1500 2000 1500
Surplus/(deficit) 1000 0 500 800
Dividend 1000 1000 1000 1000
Dividend per share 1 0 0.5 0.8
External borrowings 0 1000 500 200
Dividend of this year 1000 0 500 800
C. Dividend-payout ratio of 50% is maintained:
Under this policy, the company will distribute 50% of its earnings as dividends and fund
capital expenditures and any shortfall in earnings with external financing. The dividends p
share and external financing required in each year will be:
Year
- 1 2 3 4
Income 2000 1500 2500 2300
Cap ex 1000 1500 2000 1500
Surplus/(deficit) 1000 0 500 800
Dividend as per 50%
1000 750 1250 1150
payout policy
External borrowings 0 750 750 350
Dividend per share 1 0.75 1.25 1.15
Dividend of this year 1000 750 1250 1150
D. Maximizing aggregate dividends and minimizing external financing required:
To maximize aggregate dividends over five years, the company should adopt the dividen
payout ratio of 50% as it distributes the highest amount of dividends. However, to minim
external financing required over five years, the company should adopt the policy of treati
dividends as a residual decision as it requires the least amount of external financing over f
years.
nd then distribute the
ancing required in each
5
1800
2000
-200
1000
0
0
0
:
hare of $1 and fund its
ng. The amounts of
5
1800
2000
-200
1000
0
1000 2700
0 2300
vidends and fund its
ng. The dividends per
be:
5
1800
2000
-200
900
900 2750
0.9
900 5050
ncing required:
adopt the dividend-
However, to minimize
the policy of treating
nal financing over five
