Question

Please answer all parts to the question. Thank you!

Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend for 2012? b. If the firm had a dividend payout of $1.00 per share, increasing by $0.10 per share whenever the dividend payout fell below 50% for two consecutive years, what annual dividend would the firm pay in 20122 c. If the firm's policy were to pay $0.50 per share each period except when earnings per share exceed $3.00, when an extra dividend equal to 80% of earrings beyond $3.00 would be paid, what annual dividend would the firm pay in 2012? d. Discuss the pros and cons of each dividend policy described in parts a through a. If the firm's dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, the annual dividend for 2012 (Round to the nearest cent.) Data Table (Click on the icon located on the top right corner of the data table below in order to copy its contents into a spreadsheet.) Year Earnings per share 2019 2014 2018 2013 Earnings per share $474 HO $3.01 $321 $422 2017 $1.90 $1.86 - $1.34 $0.55 2016 2011 2015 2010 Print Done Enter your answer in the answer box and then click 4 Parts Check Answer Clear All

Answer 1

Solution:-

(a) EPS in 2012 was $1.86 per share. The company has a policy of dividend of 40% of EPS when the EPS is positive. Therefore, Dividend per share (DPS) for 2012 would be $0.744 per share (calculated as $1.86*40%)

(b) The company has a dividend policy of $1 per share, increasing by $0.1 if the dividend falls below 50% of EPS in two consecutive years. The EPS of 2011 and 2012 was -$1.34 and $1.86. So, a DPS of $1 per share is more than 50% for both years. therefore, the hike of $0.1 per share is not applicable for 2012 and the dividend for 2012 would be $1 per share.

(c) The company has a dividend policy of $0.5 per share plus a hike if EPS exceeds $3 per share in any year. The EPS for 2012 was $1.86 per share only (i.e. less than $3), therefore the dividend for the said year would be $0.5 per share.

(d)

	Pros	Cons
Dividend Policy as described in (a)	1) The constant dividend policy as % of EPS helps investors get a consistent share of yearly earnings of their stock investments in liquid income. 2) As the EPS grows, dividend income too grows along with it, making it an attractive investment 3) If the company is in losses and going through tough times, the company doesn't have to pay out cash in dividends which helps its liquidity position in challenging times.	1) The investors don't have confidence of a certain yearly income. This makes it tough to do investment planning.
Dividend Policy as described in (b)	1) Consistency in absolute amount of dividends received by investors (even in bad years of losses) which help them in their investment planning 2) Provision of hike in dividend if they fall below significant share of earnings consistently. This helps investors take advantage of the upside and growth of earnings.	1) Constant dividend policies keep dividend at same levels even if EPS is rising significantly, not letting investors take advantage in dividends if there is growth in earnings 2) The hike of $0.1 is too low and may not give investors enough advantage of significant growth in earnings.
Dividend Policy as described in (c)	1) Nice balanced policy, keeping dividends low if earnings at normal levels and giving a big share of 80% of earnings if they go above normal levels (i.e. $3) 2) Helps investors plan their investments well as there is a consistent dividend income of at least $0.5 per share even if EPS is negative	1) One can argue that dividend of $0.5 per share is too low for EPS upto $3 levels, resulting in not enough liquid yearly income for investors. 2) A hike in dividend of 80% of earnings over & above $3 per share leaves too less cash for company to invest in growth of business.