Question

Please answer all parts. thank you!

Low-regular-and-extra dividend policy Bennett Farm Equipment Sales, Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25 %, its board realizes that strict adherence to that ratio would result in a fuctuating dividend and create uncertainty for the firm's stockholders. Therefore, the firm has declared a regular dividend of $0.60 per share per year with extra cash dividends to be paid when earnings justify them. Earnings per share for the last several years are as follows: a. Calculate the payout ratio for each year on the basis of the regular $0.60 dividend and the cited EPS. b. Calculate the difference between the regular $0.60 dividend and a 25% payout for each year c. Bennett has established a policy of paying an extra dividend of $0.25 only when the difference between the regular dividend and a 25 % payout amounts to $1.00 or more. In which year would an extra dividend be paid? What would be done with the "extra" eamings that are not paid out? d. The firm expects that future earnings per share will continue to fluctuate but will remain above $3.61 per share in most years. what factors should be considered in making a revisin to the amount pais as a regular dividend? If the firm revises the regular dividend, what new amount should it pay? a. The payout ratio for year 2014 on the basis of the regular $0.60 dividend and the cited EPS is% (Round to one decimal place.) Enter your answer in the answer box and then click Check Answer Check Answer 13 parts ramaininn Clear All

Answer 1

Low-regular-and-extra-dividend Policy Example based on EPS and Dividend Payout ratio :

Dividend Payout ratio = Dividends Paid / Net Income = 1 - Retention Ratio

Dividend Payout ratio can be determined with the help of Retention Ratio where -

Retention Ratio = (Net Income - Dividend Distributed) / Net Income

It is obvious from above formula that this ratio shows percentage of net income distributed to shareholders as Dividend.

Since EPS = Net Income / No of shares outstanding, on a per share basis,

Dividend Payout Ratio = Dividend Per Share / EPS

In the instant case, we can tabulate the given info and calculate as follows :

Year	Earnings Per Share	Regular Dividend	Dividend Payout Ratio		Dividend @ 25% Payout Ratio	Difference between Regular Dividend & 25% Payout
a	b	c	d = c / b		e = b X 25%	f = c - e
2014	1.47	0.60	41%		0.37	0.23
2015	2.29	0.60	26%		0.57	0.03
2016	3.77	0.60	16%		0.94	(0.34)
2017	3.61	0.60	17%		0.90	(0.30)
2018	3.65	0.60	16%		0.91	(0.31)
2019	3.96	0.60	15%		0.99	(0.39)

Answers to questions based on above calculations :

1) Fourth column d of above Table gives the dividend payout ratio for relevant year. e.g. for 2014 it is 41% while for 2019 it is 15%

2) Sixth Column f of above Table gives the difference between regular dividend of 0.60 compared with 25% payout each year.

3) As the results of sixth column f shows that there is not a single instance where the difference between regular dividend of 0.60 with respect to 25% dividend payout ratio amounted to $ 1 or more, there is no need to pay extra dividend of $ 0.25 for any year.

Extra earnings are retained in business and are used to expand, diversify and use the same for business purposes. Some times the same may be used for dividend equalization purposes to maintain dividend in lean/adverse period/s.

4) If the firm expects to be able to maintain an EPS of at least $ 3.61 in most years in future, it should consider following factors prior to changing its regular dividend policy :

• Type of industry - It is given here that it is of cyclical nature. It is prudent to retain more during good periods so as to be able to withstand the shocks, if any, during adverse times.
• Age of the company - Considering data availability from 2014, it appears that the company is fairly new and would require to retain more in order to expand and improve its assets & business .
• Shareholding pattern : It may also need to consider and take approval of shareholders as to how much to retain in business and how much to distribute as dividend
• Government Policy : Government policy may decide the minimum to maximum rates of dividend for the industry
• Growth trend : Company needs to have a good handle over the growth or otherwise of its business model and its profits
• Taxation policy : Taxation policy of the state on dividends distributed also need to be taken into account
• Future projection : Company needs to take into account its future projection, general day-to-day business cash oriented needs and extra capital needs for expansion, etc are to be factored in deciding the appropriate dividend policy.
• Regular payment of dividend and its rate stability : These are important factors for company's credit standing and helps shareholders too.

If the firm decides to revise, based on its belief that it shall be able to maintain EPS of $ 3.61, it may change its regular dividend from current $ 0.60 per share and increase it to minimum $ 1 per share to $ 1.20 which shall roughly give a payout of 25% to 33% per year and can retain the balance for future expansion and/or to meet unplanned surprises/shocks due to its cyclical nature of business. This shall effectively result in almost doubling of current dividend of $ 0.60. The company needs to see check whether this sends any wrong and unintended signals and hurts its well earned reputation with respect to stability, growth and expansion. If it is going to be the case, then it may gradually increase the dividend from current firm 0.60 to 0.75 and then 0.90 and like that till it reaches its decided firm. This shall also give the company time to test its assumptions about EPS and add to its core competencies to withstand cyclical nature of its business. It all depends on how management views (with Shareholders' consent, of course) as to how much of dividend distribution is best in the interest of the company and its shareholders that shall eventually determine the rise in current dividend.

------------------------------------------------------------------------------------------------------------------------------------------------------

a. Payout ratio for year 2014 on the basis of the regular dividend of $ 0.60 and the cited EPS is 40.8%.