Question

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 2017? 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 2017? 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 earnings beyond $3.00 would be paid, what annual dividend would the firm pay in 2017? d. Discuss the pros and cons of each dividend policy described in parts a through c 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 (Round to the nearest cent.) annual dividend for 2017 is $ 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, the annual dividend the firm would pay in 2017 is $ (Round to the nearest cent.) 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 earnings beyond $3.00 would be paid, the annual dividend the firm would pay in 2017 is to the nearest cent.) (Round d. Which policy uses a constant-payout ratio which will yield low or no dividends if earnings decline or a loss occurs? (Select the best answer below.) O A. The policy described in part b O B. The policy described in part a O C. The policy described in part c Which policy uses a low-regular-and-extra dividend policy giving investors a stable income? (Select the best answer below.) O A. The policy described in part a O B. The policy described in part b. O C. The policy described in part c

Answer 1

a. Annual dividend for 2017 = 4.51 * 40% = 1.80

b. Annual dividend for 2017 = $1.3

	Dividend paid	Payout ratio
2010	1	1.098901099
2011	1	0
2012	1	0.7407
2013	1	0.952380952
2014	1	0.386100386
2015	1.1	0.248868778
2016	1.2	0.398671096
2017	1.3	0.288248337
2018	1.4	0.403458213
2019	1.5

c. Dividend in 2017 = 0.5 + ( 4.51 -3) *80% = 1.71 (rounded off)

d. 1. Option A, the policy described in part a

2. Option C, the policy described in part c