Target Payout Ratio = ΔDividends / (ΔEarnings * Adjustment Factor)
Adjustment Factor = 1 / t
t: number of periods (e.g. year) to meet a target payout ratio
| Dividends-increasing period | 8 years | ||
| Adjustment factor | 1/8=0.125 | ||
| Earnings | (t=0) | $ 145 * 10^6 | |
| Earnings | (t=1, expected) | $ 153 * 10^6 | |
| ΔEarnings | (from t=0 to 1, expected) | $ 8,000,000 | |
| ΔDividends | (from t=0 to 1, expected) | $ 250,000 |
Target Payout Ratio = ΔDividends / (ΔEarnings * (1/t)) = 250,000 / (8,000,000 * 0.125) = 25%
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