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 2016 and 2019 were ________.

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 2016 and 2019 were ________.

Quizplus · Accepted Answer

First, we need to calculate which years had earnings over $1.50 per share:

Year 1: $1.20 
Year 2: $1.80 
Year 3: $2.50 
Year 4: $2.10 
Year 5: $1.75

So we're only concerned with years 2-4 for the dividend policy.

For year 2: 
Earnings per share = $1.80 
Dividend payout ratio = 50% 
Dividend per share = $0.90

For year 3: 
Earnings per share = $2.50 
Dividend payout ratio = 50% 
Dividend per share = $1.25

For year 4: 
Earnings per share = $2.10 
Dividend payout ratio = 50% 
Dividend per share = $1.05

So the annual dividends for years 2016-2019 would be:

2016: $0 (no earnings over $1.50 per share) 
2019: $1.25 (earnings over $1.50 per share in 2018)

Therefore, the answer is C) $0 and $1.25, respectively.

A Firm Has Had the Following Earnings History Over the Last