A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 12 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 35 percent, and eventually reach 58 percent during the maturity stage (IV).
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage.
Stage I........ $ .10
Stage II .........1.80
Stage III .......2.80
Stage IV .......3.70
b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend?
c. In what two stages is the firm most likely to utilize stock dividends or stock splits?