Alternative dividend policies Over the last 10 years, a firm has had the earning

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 2018? b. I the had a dividend payout of $1.00 per share, increasing by S 10 per share whenever he dividend payout fel below 50% for two consecutive years, what annual d dend would the firm pay in 2018? 2018? he firm s policy were o pay $0.50 per share each penod excep when earnings per share exceed 00 when an extra dr c end equa to 80% of earnin s beyond S would be paid w a annua di dena would d. Discuss the pros and cons of each dividend policy described in parts a through c im arm 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 ann ald den or 2018 s S Round to he nearest cent.

Explanation / Answer

A) Constant payout of 40% in case of positive EPS.

EPS in 2018 = $4.66

Annual Dividend = $4.66 * 40% i.e. $ 1.86 (Rounded of to nearest cent)

B) Constant Payout of $1.00 and extra $0.10 when the Payout fall below 50% of EPS for 2 Consecutive year.

So For Annual Dividend of 2018, We see the figure of 2017, 2016.

So in both the year the Dividend i.e. $1.00 is lower then 50% of EPS and hence additional dividend of $0.10 per shhare will be paid.

So Annual Dividend of 2018 = $1.00 + $0.10 i.e. $1.10

C) A constant dividend of $0.50 per share, and additional 80% in excees of $3 when the EPS is greater then 3.

So EPS in 2018 = $4.66

Annual Dividend = $0.50 + (80% in excess of $3)

Annual Dividend = $0.50 + {($4.66 - $3.00)*80%}

Annual Dividend = $0.50 + (1.66 * 80%)

Annual Dividend = $ 2.70

I hope you like the answer please thumps up and feel free to comment on any doubt if you have. Thank you have a nice day.

PROS CONS The policy is delivering the performance of the company to shareholder. If the company perform good, shareholder get the % of good EPS and if it does not perform good the sharholders will have nothing. Dividend is directly related to EPS and hence no burden of fixed pay out. This is a very traditional method of dividend policy which focus on shareholder. So the management is bound to pay dividend and managerment cannot forgo the payment in case of profit earned. So it is a tyoe of limitation to the management.

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