P14-7 Alternative dividend policies Over the Last 10 years, a firm has had the e
ID: 2651759 • Letter: P
Question
P14-7 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 who 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
Answer
a)
Figures in $
Year
Earning per share
Annual Dividend
Dividend payout ratio * Earning per share
A
A * 0.40
2006
0.25
0.10
2007
-0.50
0.00
2008
1.80
0.72
2009
1.20
0.48
2010
2.40
0.96
2011
3.20
1.28
2012
2.80
1.12
2013
3.20
1.28
2014
3.80
1.52
2015
4.00
1.60
b)
Figures in $
Year
Earning per share
Annual Dividend
Dividend payout ratio (DPR)
Increase in dividend 0.1
Total Dividend
Constant
A
B
C
B+C
2006
0.25
1.00
4.00
0.00
1.00
2007
-0.50
1.00
-2.00
0.00
1.00
2008
1.80
1.00
0.56
0.00
1.00
2009
1.20
1.00
0.83
0.00
1.00
2010
2.40
1.00
0.42
0.00
1.00
2011
3.20
1.00
0.31
0.00
1.00
2012
2.80
1.00
0.36
0.10
1.10
2013
3.20
1.00
0.31
0.20
1.20
2014
3.80
1.00
0.26
0.30
1.30
2015
4.00
1.00
0.25
0.40
1.40
c)
Figures in $
Year
Earning per share
Annual Dividend
Earning per share beyond $ 3.00
80% of EPS beyond $ 3.00
Total Dividend
Constant
A
B
C
B+C
2006
0.25
0.50
-2.75
0.00
0.50
2007
-0.50
0.50
-3.50
0.00
0.50
2008
1.80
0.50
-1.20
0.00
0.50
2009
1.20
0.50
-1.80
0.00
0.50
2010
2.40
0.50
-0.60
0.00
0.50
2011
3.20
0.50
0.20
0.16
0.66
2012
2.80
0.50
-0.20
0.00
0.50
2013
3.20
0.50
0.20
0.16
0.66
2014
3.80
0.50
0.80
0.64
1.14
2015
4.00
0.50
1.00
0.80
1.30
d)
Dividend policy in as mentioned a) is progressive in nature and gives fixed return in % terms. Dividend is increased only when earning per share increases.
Dividend policy mentioned in b) gives fixed dividend in absolute terms and compensate for extra dividend when dividend payout ratio falls below 0.50. But at the same time it regressive in nature because at negative EPS, It also pays dividend.
Dividend policy mentioned in c) gives fixed dividend in absolute terms and also rewards when EPS increases beyond $ 3.00.
Dividend policy mentioned in b) and c) can give better sight for dividend oriented investors.
Figures in $
Year
Earning per share
Annual Dividend
Dividend payout ratio * Earning per share
A
A * 0.40
2006
0.25
0.10
2007
-0.50
0.00
2008
1.80
0.72
2009
1.20
0.48
2010
2.40
0.96
2011
3.20
1.28
2012
2.80
1.12
2013
3.20
1.28
2014
3.80
1.52
2015
4.00
1.60
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