Chapter 14, Problem 7P

DIVIDENDS Brooks Sporting Inc. is prepared to report the following 2019 income statement (shown in thousands of dollars).

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 320,000 shares of common stock outstanding, and its stock trades at $37 per share.

1. a. The company had a 25% dividend payout ratio in 2018. If Brooks wants to maintain this payout ratio in 2019, what will be its per-share dividend in 2019?
2. b. If the company maintains this 25% payout ratio, what will be the current dividend yield on the company’s stock?
3. c. The company reported net income of $1.35 million in 2018. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2018?
4. d. As an alternative to maintaining the same dividend payout ratio. Brooks is considering maintaining the same per-share dividend in 2019 that it paid in 2018. If it chooses this policy, what will be the company’s dividend payout ratio in 2019?
5. e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? Explain.