SHORT CASE 1 - THE WINNING POLICY Tina has a junior colleague, Wesley. He is studying the financial information of Chatterbox Inc. when he finds that the firm follows a 100% dividend payout policy, implying a zero growth rate. Chatterbox has an EBIT of S15,000,000 with an interest liability of $5,000,000 and is subject to a tax rate of 34% on its earnings. The number of outstanding shares are 1,200,000. The required return on equity is 14% and all cash flows are perpetuties. The financial report that Wesley is studying also mentions that the firm may shift to a 70% dividend payout policy by the time the next dividend is due. The argument is that by doing this, Chatterbox will have more retained earnings that can be ploughed back in the company to serve the need to grow faster, where; Growth (g) = Retention ratio' x actual return on equity. Wesley also notes that the Chatterbox stock is trading for its fair price, which he computes as approximately $39. He is wondering if, instead of a full payout, the policy changed to a 70% payout, would it rock the stock price? When Tina arrives at the scene, she sees Wesley lost in thought and decides to resolve his confusion. She starts by first of all checking whether Wesley has computed the correct stock price. After having done so, she demonstrates to Wesley the underlying dynamics about dividend payout, retained earnings, growth rate, the actual return on equity, the required return on equity, stock price of a firm and by extension, its value. At the end of the day, Wesley is happy to have found Tina as a senior colleague and returns home with a file that contains the entire analysis that Tina would have done for him. He then produly shows off the file to his younger sister, Anna, and passes it off as his own work. Anna is a final year student in the finance stream at the university and decides to read through the file contents after supper.
SHORT CASE 1 - THE WINNING POLICY Tina has a junior colleague, Wesley. He is studying the financial information of Chatterbox Inc. when he finds that the firm follows a 100% dividend payout policy, implying a zero growth rate. Chatterbox has an EBIT of S15,000,000 with an interest liability of $5,000,000 and is subject to a tax rate of 34% on its earnings. The number of outstanding shares are 1,200,000. The required return on equity is 14% and all cash flows are perpetuties. The financial report that Wesley is studying also mentions that the firm may shift to a 70% dividend payout policy by the time the next dividend is due. The argument is that by doing this, Chatterbox will have more retained earnings that can be ploughed back in the company to serve the need to grow faster, where; Growth (g) = Retention ratio' x actual return on equity. Wesley also notes that the Chatterbox stock is trading for its fair price, which he computes as approximately $39. He is wondering if, instead of a full payout, the policy changed to a 70% payout, would it rock the stock price? When Tina arrives at the scene, she sees Wesley lost in thought and decides to resolve his confusion. She starts by first of all checking whether Wesley has computed the correct stock price. After having done so, she demonstrates to Wesley the underlying dynamics about dividend payout, retained earnings, growth rate, the actual return on equity, the required return on equity, stock price of a firm and by extension, its value. At the end of the day, Wesley is happy to have found Tina as a senior colleague and returns home with a file that contains the entire analysis that Tina would have done for him. He then produly shows off the file to his younger sister, Anna, and passes it off as his own work. Anna is a final year student in the finance stream at the university and decides to read through the file contents after supper.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following:
Note: 1 Retention ratio = 1 – Dividend payout ratio
a) What is the current Dividend per share (DPS) for Chatterbox Inc., assuming a 100% dividend payout policy?
Transcribed Image Text:SHORT CASE 1 - THE WINNING POLICY
Tina has a junior colleague, Wesley. He is studying the financial information of Chatterbox Inc. when he finds
that the firm follows a 100% dividend payout policy, implying a zero growth rate. Chatterbox has an EBIT of
$15,000,000 with an interest liability of $5,000,000 and is subject to a tax rate of 34% on its earnings. The
number of outstanding shares are 1,200,000. The required return on equity is 14% and all cash flows are
perpetuties.
The financial report that Wesley is studying also mentions that the firm may shift to a 70% dividend payout
policy by the time the next dividend is due. The argument is that by doing this, Chatterbox will have more
retained earnings that can be ploughed back in the company to serve the need to grow faster, where;
Growth (g) = Retention ratio' x actual return on equity.
Wesley also notes that the Chatterbox stock is trading for its fair price, which he computes as approximately
S39. He is wondering if, instead of a full payout, the policy changed to a 70% payout, would it rock the stock
price?
When Tina arrives at the scene, she sees Wesley lost in thought and decides to resolve his confusion. She
starts by first of all checking whether Wesley has computed the correct stock price. After having done so, she
demonstrates to Wesley the underlying dynamics about dividend payout, retained earnings, growth rate, the
actual return on equity, the required return on equity, stock price of a firm and by extension, its value.
At the end of the day, Wesley is happy to have found Tina as a senior colleague and returns home with a file
that contains the entire analysis that Tina would have done for him. He then produly shows off the file to his
younger sister, Anna, and passes it off as his own work. Anna is a final year student in the finance stream at
the university and decides to read through the file contents after supper.
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