Question: Low-regular-and-extra dividend policy Bennett Farm …
Low-regular-and-extra dividend policy
Bennett Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm as a target payout ratio of 25%, its board realizes that strict adherence to that ration would result in a fluctuating dividend and create uncertainty for the firm’s stockholders. Therefore, the firm has declared a regular dividend of $.50 per share per year with extra cash dividends to be paid when earnings justify them. Earnings per share for the last several years are shown in the following table:
Year EPS
2015 $3.00
2014 $2.40
2013 $2.20
2012 $2.80
2011 $2.15
2010 $1.97
- a) Calculate the payout ratio for each year on the basis of the regular $.50 dividend and cited eps.
- b) Calculate the difference between the regular $.50 dividend and a 25% payout for each year.
- c) Bennett has established a policy of paying an extra dividend of $.25 only when the difference between the regular dividend and a 25% payout amount to $1.00 or more. Show the regular and extra dividends in those years when an extra dividend would be paid. What would be done with the “extra” earnings that are not paid out?
- d) The firm expects that future earnings per share will continue to cycle but will remain above $2.20 per share in most years. What factors should be considered in making a revision to the amount paid as a regular dividend? If the firm revises the regular dividend, what new amount should it pay?
