Over the last 10 years, a firm has had the earnings per share shown in the follo

Question

Over the last 10 years, a firm has had the earnings per share shown in the following table.

Year - Earnings per share - Year - Earnings per share

2015 - $4.00 - 2010 - $2.40

2014 - 3.80 - 2009 - 1.20

2013 - 3.20 - 2008 - 1.80

2012 - 2.80 - 2007 - 0.50

2011 - 3.20 - 2006 - 0.25

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 beyond $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

Year Earning Per Share Dividend Pyout ratio Dividend for the year 2015 4 40% 1.6 2014 3.8 40% 1.52 2013 3.2 40% 1.28 2012 2.8 40% 1.12 2011 3.2 40% 1.28 2010 2.4 40% 0.96 2009 1.2 40% 0.48 2008 1.8 40% 0.72 2007 0.5 40% 0.2 2006 0.25 40% 0.1

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