Question

Year 2019 2018 2017 2016 2015 Earnings per share $3.85 $4.89 $4.64 $2.38 $4.92 Year 2014 2013 2012 Earnings per share $3.77 $1.07 $1.65 - $1.58 $0.47 2011 2010

Answer 1

PART A-

In the First Questions the firm will be paying a dividend payout of 40% if the earning are positive which means if earnings are greater than 0. If the earnings are less than 0 the firm will not pay any dividends.

In 2014 the Earning Per Share for the company was $ 3.77 per share which is positive.

Hence the company will be paying a dividend of 40% in 2014

So the Annual Dividend paid by the company in 2014 will be

Dividend = 3.77*40% = 1.508 per share.

PART B-

YEAR	2010	2011	2012	2013	2014
EARNINGS	0.47	-1.58	1.65	1.07	3.77
DIVIDEND	1	1	1	1	1
DIVIDEND PAYOUT RATIO	213%	-63%	61%	93%	26.5%

THE FORMULA FOR DIVIDEND PAYOUT RATIO IS = DIVIDEND PAID / EARNINGS

IN THIS QUESTION THE COMPANY IS CONSTANTLY PAYING A DIVIDEND OF 1$ IRRESPECTIVE OF ITS EARNINGS. AND THE DIVIDEND WILL BE INCREASED BY 0.1$ IN CASE THE PAYOUT IS LESS THAN 50% FOR 2 CONSECUTIVE YEARS.

AS YOU COULD SEE FROM THE ABOVE TABLE THE DIVIDEND PAYOUT HAS BEEN BELOW 50% JUST FOR 1 YEAR WHICH IS 2011. FOR ALL OTHER YEARS IT WAS ABOVE 50%.

THEREFORE THERE WILL NO CHANGE IN THE DIVIDEND PAYOUT PER SHARE IN 2014

DIVIDEND IN 2014 WILL BE 1$

PART C-

In this Question the firm is paying a Dividend of a minimum amount 0.5$ per share each year, except for when the earnings increase beyond 3$ per share.

Therefore in this Question from 2010-2013 the company would have constantly paid an amount of 0.5$ since its earning was below 3$ per share across those years.

However in 2014 the earnings stood at 3.77$ which is greater than 3$.

The questions says that when the earnings go beyond 3$, an extra dividend of 80% on the earnings beyond 3$ will be paid.

This means any earnings above 3$ which the company earns (3.77-3= 0.77$) in this case, the company will pay a dividend of 80% of the additional amount, that is (0.77$ * 80%) will be the additional dividend over 0.5$.

So the total dividend for 2014 in this case is = 0.5$ +((3.77 - 3)*80%) = 0.5$+ (0.77$*80%) = 0.5$+0.616$ = 1.116$

So therefore total Dividend for 2014 = 1.116$

PART D-

PROS AND CONS OF PART A- CONSTANT DIVIDEND POLICY (40%) IF EARNINGS ARE GREATER THAN 0 OTHERWISE 0%

The advantage of this policy is that investors will receive a certain amount of dividend whenever the company generates positive earnings. The investor is always a part of the company's profits and it shows that the company is interested in sharing its profits with its investors who have placed their trust with the company.

The disadvantage of this policy is that when the company will not be earning any profits it will not be paying anything to the investor which may be a worrying sign because on one hand due to the company's bad performance the investor would be losing money on the share price and would not be getting compensated through dividends. This also shows the company's lack of interest towards its shareholders which causes the investors/shareholders to loose trust and the share price begins a free fall.

PROS AND CONS OF PART B- CONSTANT DIVIDEND PAYOUT (IN AMOUNT) AND INCREASE WITH CONTINUOUS INCREASE IN EARNINGS)

This advantages of this type of a payment structure is that the investor will be receiving a particular amount of dividend irrespective of the company's earnings and will also get compensated with higher dividend if the dividend payout is below 50% for 2 consecutive years which will be the case only when the company is increasing its earnings constantly. This shows that the company is willing to compensate the investors irrespective of its performance and also include the shareholders in the payout as and when they increase their earnings through better performance.

The disadvantages of this payout is that when the company will be in a growth phase it will need as much capital as possible to grow and will also suffer losses or have low earnings in earlier years. If the company sets a constant amount dividend policy it will have to raise additional money for its expansion and for dividend payout which will end up either diluting the share capital even further or make the firm levered further. This is the risk in this dividend payout policy

PROS AND CONS OF PART C- CONSTANT DIVIDEND PAYOUT (AMOUNT) AND GIVING OUT A LARGE CHUNK IN CASE EARNINGS CROSS A CERTAIN LIMIT.

This type of dividend policy has a same structure as the above mentioned one, the difference stands that it is much more giving in nature. It allows the investor to earn much more than in the previous structure. This type of dividend policy is suitable for companies which are in a stable phase and dont have a lot to reinvest.

The disadvantage of such a policy is mainly on Growing companies since instead of reinvesting more and maintaining the growth trajectory they end up paying their investors which might lead to missed opportunities and loss in growth.

Please Do Share your Views if Any.

Thank you