Alternative dividend policies Over the last 10 years, a firm has had the earning
ID: 2651639 • Letter: A
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 each year? 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 each year? 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 be-yond $3.00 would be paid, what annual dividend would the firm pay each year? d. Discuss the pros and cons of each dividend policy described in parts a through c.Explanation / Answer
Solution-a
Year
Dividends per share
Annual dividend each year (Earning per Share*40%)
2015
$1.60
$4.00 *40%
2014
$1.52
$3.80*40%
2013
$1.28
$3.20*40%
2012
$1.12
$2.80*40%
2011
$1.28
$3.20*40%
2010
$0.96
$2.40*40%
2009
$0.48
$1.20*40%
2008
$0.72
$1.80*40%
2007
$0.00
$(0.50) *40%
2006
$0.10
$0.25*40%
Solution-b
Year
Dividends per share
2015
$1.30
2014
$1.20
2013
$1.20
2012
$1.10
2011
$1.10
2010
$1.00
2009
$1.00
2008
$1.00
2007
$1.00
2006
$1.00
Solution-c
Year
Dividends per share
2015
$1.30
2014
$1.14
2013
$0.66
2012
$0.50
2011
$0.66
2010
$0.50
2009
$0.50
2008
$0.50
2007
$0.50
2006
$0.50
Solution-d
Looking through each dividend policy and deciding which would be best depends on when shares were purchased and if they continue to give dividend or not. For instance, part a starts off with the lowest dividend but grows substantially over the ten years only to be expected to continue growing. In the long run, part a would be the best choice. Part b on the other hand has a great starting amount which Part b on the other hand has a great starting amount which will increase as the company grows but at a very slow and restricting rate. Therefore part b would be great if you weren't planning on continuing your shares in that firm Part c would be the least recommended of these choices but if the firm were to grow quite little bit in recent period, the dividend policy of part c end up making the highest return. But the growth rate will be quite substantial.
Year
Dividends per share
Annual dividend each year (Earning per Share*40%)
2015
$1.60
$4.00 *40%
2014
$1.52
$3.80*40%
2013
$1.28
$3.20*40%
2012
$1.12
$2.80*40%
2011
$1.28
$3.20*40%
2010
$0.96
$2.40*40%
2009
$0.48
$1.20*40%
2008
$0.72
$1.80*40%
2007
$0.00
$(0.50) *40%
2006
$0.10
$0.25*40%
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