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: LOADING.... 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 40 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 50 percent of profits exceeding ​$20,000,000.

c. A constant dividend payout ratio of 35 percent.

YEAR   PROFITS AFTER TAXES
1   19,000,000
2   22,000,000
3   20,000,000
4   24,000,000
5   26,000,000

Answer 1

a.
Calculate yearly dividend per share
Total earnings over 5 years	$44,400,000	(19+22+20+24+26)*40%
Average dividend a year	$8,880,000	44400000/5
Dividend per share	$1.15	8880000/7700000
b.
Year	Profit after taxes	Profit exceeding $20,000,000	Extra dividend @ 50%	Extra dividend per share	Regular dividend	Total dividend per share
1	$19,000,000	$0	$0	$0.00	$0.70	$0.70
2	$22,000,000	$2,000,000	$1,000,000	$0.13	$0.70	$0.83
3	$20,000,000	$0	$0	$0.00	$0.70	$0.70
4	$24,000,000	$4,000,000	$2,000,000	$0.26	$0.70	$0.96
5	$26,000,000	$6,000,000	$3,000,000	$0.39	$0.70	$1.09
c.
Calculate dividend per share based on 35% constant payout ratio
Year	Profit after taxes	Total dividend @ 35%	Dividend per share
1	$19,000,000	$6,650,000	$0.86
2	$22,000,000	$7,700,000	$1.00
3	$20,000,000	$7,000,000	$0.91
4	$24,000,000	$8,400,000	$1.09
5	$26,000,000	$9,100,000	$1.18