Answered: a) If the firm's dividend policy were…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 4FPE: The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million...

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Question

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

Years and Earnings per share

2022 4.35 2017 3.09
2021 4.95 2016 1.55
2020 3.24 2015 1.78
2019 2.67 2014 -1.92
2018 4.35 2013 0.96

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 2018?

$1.74

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 2018?

(enter your response here)

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 2018?

(enter your response here)

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

(enter your response here)

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