Question

​(Alternative dividend policies​)
Final earnings estimates for the Smithfield Meat Packing Company have been prepared for the CFO of the company and are shown in the following​ table:
YEAR   PROFITS AFTER TAXES
1 18,000,000
2 21,000,000
3 19,000,000
4 23,000,000
5 25,000,000
The firm has 7,700,000 shares of common stock outstanding. As assistant to the​ CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible​ policies:

a. A stable dollar dividend targeted at 50 percent of earnings over a​ 5-year period.

b. A​ small, regular dividend of ​$0.70 per share plus a​ year-end extra when the profits in any year exceed ​$20,000,000. The​ year-end extra dividend will equal 60 percent of profits exceeding ​$20,000,000.

c. A constant dividend payout ratio of 45 percent.

Answer 1

Year	1	2	3	4	5
Profit after taxes in $ (A)	18,000,000.00	21,000,000.00	19,000,000.00	23,000,000.00	25,000,000.00
Number of shares outstanding(N)	7,700,000.00

Answer a) Dividend per share distributed at 50% of earnings over a 5 year period = 0.5 X (A_n) / (N) where An= Profit after taxes in year 1 to 5, n= 1,2,3,4,5

Year	1	2	3	4	5
Dividend per share in $ =0.5x(An)/(N)	1.17	1.36	1.23	1.49	1.62

Answer b)

Year	1	2	3	4	5
Profit after taxes Exceeding 2000000 $	-	1,000,000.00	-	3,000,000.00	5,000,000.00
Regular dividend (D)	0.70	0.70	0.70	0.70	0.70
Dividend per share to be paid for exceeding 20,000000 $ (E )	-	0.08	-	0.23	0.39
Total Dividend to be paid per share (D) + (E )	0.70	0.78	0.70	0.93	1.09

Answer c)

Year	1	2	3	4	5
Profit after taxes	18,000,000.00	21,000,000.00	19,000,000.00	23,000,000.00	25,000,000.00
Dividend per share @45% of Profits after taxes [(A) x 0.45/(N)]	1.05	1.23	1.11	1.34	1.46