Cromwell Laboratories has a target payout ratio of 60%. However, the board realizes the that adhering strictly to the payout ratio will cause the dividend payout to fluctuate. Therefore, the board has declared regular dividend of $0.75 per share per year while paying extra cash dividends if funds are available. Earnings per share for the period 2015 to 2020 are shown in the following table. YearEPSYearEPS202020192018$3.50$3.10$2.80201720162015$2.40$2.35$1.95 Calculate the payout ratio for each year on the basis of the regular dividend payment and the EPS given.For each year, what is the difference between the regular $0.75 dividend and a 60% payout?Cromwell Laboratories decides to pay an extra dividend of $0.50 in years when the difference between the regular $0.75 dividend and the 60% payout is at least $0.70. Indicate the dividend payments and “extra” dividend payments, if any, for each year.The company estimates future earnings per share will remain above $3.20 per share for most years. If the board wants to increase the regular dividend from $0.75 to $1.25, what factors should it consider implementing the new regular dividend?

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 20P

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Cromwell Laboratories has a target payout ratio of 60%. However, the board realizes the that adhering strictly to the payout ratio will cause the dividend payout to fluctuate. Therefore, the board has declared regular dividend of $0.75 per share per year while paying extra cash dividends if funds are available. Earnings per share for the period 2015 to 2020 are shown in the following table.

Year

EPS

Year

EPS

2020

2019

2018

$3.50

$3.10

$2.80

2017

2016

2015

$2.40

$2.35

$1.95

Calculate the payout ratio for each year on the basis of the regular dividend payment and the EPS given.
For each year, what is the difference between the regular $0.75 dividend and a 60% payout?
Cromwell Laboratories decides to pay an extra dividend of $0.50 in years when the difference between the regular $0.75 dividend and the 60% payout is at least $0.70. Indicate the dividend payments and “extra” dividend payments, if any, for each year.
The company estimates future earnings per share will remain above $3.20 per share for most years. If the board wants to increase the regular dividend from $0.75 to $1.25, what factors should it consider implementing the new regular dividend?

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