B2. (Dividend Policy)
Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)
Individual assignment: Text Problem Set
Chapter , Problems
B2. (Dividend Policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in mill ions.
a. Over the five-year period, what is the maximum overall payout ratio the firm could
achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.
1 2 3 4 5 THEREAFTER
Earnings 100 125 150 120 140 150+per year
Discretionary cash flow50 70 60 20 15 50+per year
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