Over the last 10 years, a firm has had the earnings per share shown in the follo

Question

Over the last 10 years, a firm has had the earnings per share shown in the following table. 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 each year? 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 each year? 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 each year? Discuss the pros and cons of each dividend policy described in parts a through c.

Explanation / Answer

Option a is better as a cosntant dividend payout ration maintains a steady expectation among the stockholders and also keeps a steady source of retained earning intact.

Option b. Is not so good option by logic as in bad years the dividend payout is more and the stockholders do not get the reward in that proportion in good years.

option c is a better way to reward stockholders in good years. Still the dividend in years having EPS from negative to 2 , the DPS is same, which may help maintaining the stock price, but may be a stessful option in bad years.

Year   EPS Option a. EPS option b. option c. Year 2006               0.25                     0.10                         1.00                 0.50 Year 2007             (0.50)                          -                           1.00                 0.50 Year 2008               1.80                     0.72                         1.00                 0.50 Year 2009               1.20                     0.48                         1.00                 0.50 Year 2010               2.40                     0.96                         1.00                 0.50 Year 2011               3.20                     1.28                         1.10                 0.66 Year 2012               2.80                     1.12                         1.10                 0.50 Year 2013               3.20                     1.28                         1.10                 0.66 Year 2014               3.80                     1.52                         1.10                 1.14 Year 2015               4.00                     1.60                         1.10                 1.30

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