How would change in investment opportunities affect dividend

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Reference no: EM132952225

Question

a. Residual dividend model is an approach commonly used by companies to determine their dividend payments. What is the residual dividend model? Describe some of its advantages and disadvantages. Provide the equation for the model.

b. Using the above information, determine the amount of forecast income that can be used as dividend payment if the forecast income is going to grow at the rate of 10% of the current level of net income and the capital structure remains at the current level.

c. Assuming the total number of shares outstanding remains at the current level, determine the earnings per share (EPS), dividend per share (DPS), and the payout ratio of this company.

d. If the forecast income level drops by 60%, due to COVID-19 and the capital structure of the firm capital structure remains at the current, determine the amount of income that can be used for dividend payment. Assuming the total number of shares outstanding remains at the current level, determine the earnings per share (EPS), dividend per share (DPS), and the payout ratio of the company. Briefly describe the effect of the drop in income on the company's ability to make dividend payments. What are the necessary actions that need to be considered to overcome this problem?

e. Supposed we are able to control the COVID-19 pandemic next year and the economic and business forecasts appear to be much better. The net income is expected to grow at 20%, and the level of the capital structure remains at the current situation, determine the amount of net income that can be used as a dividend payment. Assuming the total number of shares outstanding remains at the current level, determine the earnings per share (EPS), dividend per share (DPS), and the payout ratio.

f. How would a change in investment opportunities affect dividends under the residual policy? Use the above computations to illustrate.

g. Will the residual dividend policy provide a certain kind of signal to the company's shareholders and investors? Explain.

h. Is this policy attractive for certain clientele? Explain this in the context of the dividend policy issues.

Reference no: EM132952225

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