Chapter 14, Problem 14.7P

Alternative dividend policies Over the past 10 years, a firm has had the earnings per share shown in the following table.

1. 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 each year?
2. 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 2 consecutive years, what annual dividend would the firm pay each year?
3. 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 each year?
4. d. Discuss the pros and cons of each dividend policy described in parts a through c.