Dividend policy

(Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share 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 below in millions.

A.over the five year period, what is the maxium overall payout ratio the firm could acieve 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

Discrecreary cash flow 50 70 60 20 15 50+per year

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