A firm has had the following earnings history over the last five years: If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 2012 and 2015 were ________.
A) $0.50 and $1.25, respectively
B) $0 and $2.00, respectively
C) $0 and $1.25, respectively
D) $0 and $0.88, respectively

Question

A firm has had the following earnings history over the last five years:  If the firm's dividend policy was based on a constant payout ratio of 50 percent for all of the years with earnings over $1.50 per share and a zero payout otherwise, the annual dividends for 2012 and 2015 were ________.
A) $0.50 and $1.25, respectively 
B) $0 and $2.00, respectively 
C) $0 and $1.25, respectively 
D) $0 and $0.88, respectively

Quizplus · Accepted Answer

Using the constant payout ratio of 50%, we need to determine which years have earnings over $1.50 per share:

- 2011: $2.00 x 50% = $1.00 (dividend of $1.00)
- 2012: $1.00 x 50% = $0.50 (dividend of $0.50)
- 2013: $0.50 x 0% = $0 (no dividend)
- 2014: $1.50 x 50% = $0.75 (dividend of $0.75)
- 2015: $2.50 x 50% = $1.25 (dividend of $1.25)

Therefore, the annual dividends for 2012 and 2015 were $0 and $1.25, respectively. The correct answer is C.

A Firm Has Had the Following Earnings History Over the Last