A firm has 20 million common shares outstanding. It currently paysout $1.50 per

Question

A firm has 20 million common shares outstanding. It currently paysout $1.50 per share per year in cash dividends on its common stock.Historically, its payout ratio has ranged from 30% to 35%. Over thenext five years it expects the earnings and discretionary cash flowshown below in millions.

a.     Over the five-year period, what isthe maximum overall payout ratio the firm could achieve withouttriggering a securities issue?

b. Recommend a reasonable dividend policy for paying outdiscretionary cash flow in years 1 through 5.

Explanation / Answer

Total discretionary cash flow = $50 + $70 + $60 + $20 +$15 = $215

Total earnings = $100 + $125 + $150 + $120 + $140 =$635

Maximum Payout Ratio = $215 / $635 = 33.86%

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