Salsa Inc. estimates that this year’s earnings will be $75 million. There are 12 million shares outstanding at a price of $27.50 per share. Salsa had been following a 100% dividend payout policy until now but would now like to shift to the Residual Dividend policy for this year. Dividends from this year’s earnings are paid next year. a) What is the EPS and DPS for Salsa under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million and the target capital structure is 1.5:1, will Salsa Inc. be able to pay dividends as per the Residual Dividend Policy? Ifso, what will be the dividend pershare? Investorsrequire a 22.72% rate of return. Ignoretaxes. c) If Salsa Inc. shifts from a 100% payout policy to the residual dividend policy, what impact will this have on its stock price, assuming the firm earns 22.72% as its ROE? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated through this computation? (Assume constant growth rate stock valuation model for computing stock price)
Question 2
Salsa Inc. estimates that this year’s earnings will be $75 million. There are 12 million shares
outstanding at a price of $27.50 per share. Salsa had been following a 100% dividend payout
policy until now but would now like to shift to the Residual Dividend policy for this year.
Dividends from this year’s earnings are paid next year.
a) What is the EPS and DPS for Salsa under the 100% dividend payout policy?
b) If the planned capital outlay is for $72 million and the target capital structure is 1.5:1,
will Salsa Inc. be able to pay dividends as per the Residual Dividend Policy? Ifso, what
will be the dividend pershare? Investorsrequire a 22.72%
c) If Salsa Inc. shifts from a 100% payout policy to the residual dividend policy, what
impact will this have on its stock price, assuming the firm earns 22.72% as its ROE?
Support your argument through relevant computations. Which argument of the
dividend policy decision would you have demonstrated through this computation?
(Assume constant growth rate stock valuation model for computing stock price)
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