Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and follows a constant payout ratio policy,its dividend will be

Question

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If Choc-lattes Corp. follows a constant payout ratio policy, it will pay out the same proportion of earnings as dividends. The dividend payout ratio can be calculated as:

Dividend payout ratio = Dividend per share / Earnings per share

In 2006, the dividend payout ratio was:

Dividend payout ratio = $2.00 / $5.00 = 0.4 or 40%

If the company earns $5.50 per share in 2007 and maintains the same payout ratio, the dividend per share will be:

Dividend per share = Dividend payout ratio x Earnings per share
Dividend per share = 0.4 x $5.50 = $2.20

Therefore, the answer is choice C) $2.20.

Choc-Lattes Corp