Delta Corp. earned $2.50 per share during fiscal year 2008 and paid cash dividen

Question

Delta Corp. earned $2.50 per share during fiscal year 2008 and paid cash dividends of $1.00 per share. During the fiscal year that just ended on December 31, 2009, Delta earned $3.00 per share and the firm's managers expect to earn this amount per share during fiscal years 2010 and 2011 as well.
a) What was Delta's payout ratio for fiscal year 2008?
b) If Delta's managers want to follow a constant nominal dividend policy what dividend per share will they declare for fiscal year 2009?
c) If Delta's managers want to follow a constant payout ratio dividend policy, what dividend per share will they declare for fiscal year 2010?
d) If Delta's mangers want to follow a partial-adjustment strategy, with a target payout ratio equal to FY 2008's how could they change dividend payments during 2009,2010 and 2011?

Explanation / Answer

a) Dividend payout ratio for year 2008: Dividend payout ratio = Dividend per share / Earnings per share                                   = $1.00 / $2.5                                   = 0.4 or 40% b) If they want to maintain a constant dividend policy, then they will maintain the same Dividend per share $1.00 which they declared in 2008. c) We know the EPS is $3.00 for 2010 and the constant dividend payout ratio is 40% Dividend per share = Dividend payout ratio * Earnings per share                              = 0.40 * $3.00                              = $1.2 d) If the managers wants to follow partial-adjustment strategy, the company slowly adjusts the dividend payment towards the 2008 target payout ratio of 40% . In 2009,2010,2011 the company EPS remains constant.

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