Over the last 10 years, a firm has had the earnings per share shown in the following table.
Year - Earnings per share - Year - Earnings per share
2015 - $4.00 - 2010 - $2.40
2014 - 3.80 - 2009 - 1.20
2013 - 3.20 - 2008 - 1.80
2012 - 2.80 - 2007 - 0.50
2011 - 3.20 - 2006 - 0.25
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?
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 each year?
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?
d. Discuss the pros and cons of each dividend policy described in parts a through c.