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Dividend Policy and Common Shares Outstanding

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A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown in millions.

a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?

b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.

____________________________1_____2_____3_____4_____5_____Thereafter_________________
Earnings 100 125 150 120 140 150+ per year
Discretionary cash flow 50 70 60 20 15 50+ per year

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The solution examines the dividend policy and maximum overall payout for a firm.

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B2. (Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout
ratio has ranged from 30% to 35%. Over the next five years it ...

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Manal Elkhoshkhany, MBA
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  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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