Question

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

.

2015	$1.50	2010	$3.55
2014	$3.01	2009	$1.76
2013	$3.73	2008	$1.76
2012	$2.93	2007	-$1.31
2011	$4.81	2006	$0.56

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

2015??

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 in 2015??

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 in 2015??

d.??Discuss the pros and cons of each dividend policy described in parts a through

Answer 1

a) Earnings per share for 2015 = $1.50

payout ratio , p = 40% = 0.40

Dividend per share in 2015 = p*Earnings per share for 2015 = 0.40*1.5 = $0.60

b)

Dividend in 2006 = $1

Dividend in 2007 = $1

Dividend in 2008 = $1

Dividend in 2009 = $1

Dividend in 2010 = $1.10 ( since dividend payout in this case was less than 50%)

Dividend in 2011 = $1.10

Dividend in 2012 = $1.20 ( since dividend payout of 1.1 will be less than 50% , it will increase by $0.1 for 2 years again)

Dividend in 2013 = $1.20

Dividend in 2014 = $1.30

Dividend in 2015 = $1.30

c)

Since EPS in 2015 = 1.50 which is less than $3.00 hence dividend per share paid = $0.50

d)

comparing the dividend policies in each part

we can see that in part a it starts with the lowest dividend and and since it is a fixed percentage of earnings , it increases and decreases as the earnings increases and decreases and follows the trend of earnings

in part b , the dividend is mostly constant except in some years when payout is less than 50% .

in par c also, dividend remains more or less constant except in some years when EPS is greater than 3.00

comparing the three part a would be the most preferred choice because in this case the investors can enjoy a higher dividend when the earnings of the company increases.