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 1999 and 2003 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 1999 and 2003 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

To calculate the dividends for 1999 and 2003 based on the given payout policy, we need to first identify the years with earnings over $1.50 per share:

Year    Earnings per Share
1999    $1.20
2000    $1.40
2001    $1.60
2002    $1.80
2003    $2.00

Based on the above table, only the earnings for 2001, 2002, and 2003 are above $1.50 per share. Therefore, the firm will pay out dividends only for these years.

For each of these years, the dividend payout will be 50% of earnings per share. Therefore, the dividends for 1999 and 2003 will be:

Dividend for 1999 = 0 (as earnings are less than $1.50 per share)
Dividend for 2003 = 50% * $2.00 = $1.00 per share = $1.25 (as there are 1.25 shares outstanding)

Hence, the answer is C.

A Firm Has Had the Following Earnings History Over the Last