Bennet farm Equipment sales is in a highly cyclic business. Although the firm ha

Question

Bennet farm Equipment sales is in a highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to the ratio would result in a fluctuating dividend and create uncertainty for the stockholders. Therefore, the firm has declared a regular dividend 0f $0.50 per share per year with extra cash dividends to be paid when the earnings justify them. Earnings per share for the last several years are shown below

2010 at $1.97, 2011 at $2.15, 2012 at $2.80, 2013 at $2.20, 2014 at $2.40, 2015 at $ 3.00

a) calculate the payout ratio for each year on the basis of the regular $0.50 dividend and the cited EPS.

b) calculate the difference between the regular $0.50 dividend and a 25% payout for each year.

c) Bennet has established a policy of paying an extra dividend of $0.25 only when the difference between the regular dividend and a 25% payout amounts to $1.00 or more. Show the regular and extra dividendsin those years when an extra dividend would be paid.

Explanation / Answer

c) in none of the year dividend is more than 1

payout ratio calculated as 0.5 dividend /EPS

difference calculated as 0.5-EPS*0.25

2010 2011 2012 2013 2014 2015 1.97 2.15 2.8 2.2 2.4 3 a) payout ratio 0.253807 0.232558 0.178571 0.227273 0.208333 0.166667 b) difference 0.0075 -0.0375 -0.2 -0.05 -0.1 -0.25

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