SOLUTIONS TO REVIEW QUESTIONS

17-1 The dividend payout ratio indicates the amount of dividends paid relative to
the earnings available to ordinary shareholders. It is measured by dividend per share
(DPS) divided by earnings per share (EPS).
17-7 Company law prevents a company from paying dividends from its capital.
Restrictions in debt and preference share contracts may also limit dividends. These
contract provisions may stipulate that dividends are not to be paid from profits before
the repayment of debt. Also, the provisions may require that a certain amount of
working capital must be maintained by the company. Finally, if any preference
dividends remain unpaid, a provision may restrict the payment of dividends on
ordinary shares

17-12 Dividend reinvestment schemes enable shareholders to forego the receipt of
dividends in cash in exchange for using the dividend amount to purchase shares in
the company (often at a discount below the current market price). These schemes
enable companies to provide franking credits to shareholders and yet retain the cash
that would otherwise be paid out in dividend cheques.

17-13 The declaration date is the date that the dividend is formally authorised by the
board of directors. Investors recorded as owning shares on the date of record are
paid the declared dividend. The ex-dividend date is five clear days prior to the
record date. This date is set by the stock exchange as the date when the right of
ownership to the dividend is terminated.

SOLUTIONS TO PROBLEMS
17-2 (A) (B) (C)
Funds available Equity contribution
Year Investment Internally (A 0.65)
1 $ 350,000 $ 250,000 $ 227,500
2 475,000 450,000 308,750
3 200,000 600,000 130,000
4 980,000 650,000 637,000
5 600,000 390,000 390,000
$2,340,000 $1,693,250

(b)
Residual Dividend (per share):
Year Dividend
1 $0.23
2 $1.41
3 $4.70
4 $0.13
5 $0.00


(c)
The target dividend allows for consistency of income to the shareholder in all years whereas
the year-to-year dividend would not pay a dividend in year five.


(d)
It may not be a good policy because the residual-dividend policy would not maximise the
amount of fully franked dividends that shareholders could receive. To recapture funds
otherwise paid out as franked dividends, a dividend reinvestment scheme could be
considered.

17-6 (a) Total Profits After Taxes $8,960,000

(i) Year Dividend = Profits Payout Ratio / Shares
1 $0.56 = $1,400,000 (0.4) / 1,000,000
2 $0.80 = $2,000,000 (0.4) / 1,000,000
3 $0.74 = $1,860,000 (0.4) / 1,000,000
4 $0.36 = $ 900,000 (0.4) / 1,000,000
5 $1.12 = $2,800,000 (0.4) / 1,000,000

(ii) Target dividend= (50% *8960,000/1,000,000)/5 years=$0.896




(iii) Year Dividend = Profits Payout Ratio / Shares
1 $1.12 = $1,400,000 (0.8) / 1,000,000
2 $1.60 = $2,000,000 (0.8) / 1,000,000
3 $1.48 = $1,860,000 (0.8) / 1,000,000
4 $0.72 = $ 900,000 (0.8) / 1,000,000
5 $2.24 = $2,800,000 (0.8) / 1,000,000

(b) Crystal could pay out the high dividends under (iii) and still fund its
investment projects by using a dividend reinvestment scheme. However, the
number of shares on issue will increase beyond 2,000,000, changing the
DPS. The company would need to predict to what extent shareholders
would use the scheme each year, and estimate the additional new shares and
the DPS for each year.


17-12 (a) Proposed dividend/share = 500,000 / 5,000,000 $0.10
Buyback price = $4.00 + $0.10 = $4.10
(b) Number of shares repurchased = $500,000 / $4.10 = 121,951
The new EPS would be
(c) The capital gains to be received by the shareholders would not
be equal to the intended dividend, thus resulting in a dollar benefit or loss to
the shareholders. Unless you have a need for current income, you would
probably prefer the share repurchase plan. The actual number of shares held
(10,000) is not of significance.

17-15* Total Profits After Taxes $8,500,000

(a) Year Dividend = Profits Payout Ratio / Shares
1 $0.40 = $1,000,000 (0.4) / 1,000,000
2 $0.80 = $2,000,000 (0.4) / 1,000,000
3 $0.64 = $1,600,000 (0.4) / 1,000,000
4 $0.36 = $ 900,000 (0.4) / 1,000,000
5 $1.20 = $3,000,000 (0.4) / 1,000,000

(b)


(c) Year Dividend
1 $0.50
2 $0.75= 0.50 + ($2,000,000 $1,500,000) (0.5) / 1,000,000
3 $0.55= 0.50 + ($1,600,000 - $1,500,000) (0.5) / 1,000,000
4 $0.50
5 $1.25=0.50 + ($3,000,000 - $1,500.,000) (0.5) / 1,000,000