Final answer:
The senior management of Bettis Company is deciding between a high or low dividend payout rate. The impact of this decision is significant as dividends are a direct form of profit distribution to shareholders. Historical S&P 500 trends show a decrease in dividend rates from 4% to 1-2% since the 1990s.
Step-by-step explanation:
The senior management team at Bettis Company is contemplating the appropriate rate of dividend payout from its net income. Dividends represent a way for companies to distribute a portion of their profits directly to shareholders, with the amount received by each shareholder proportional to their number of shares held. In the context of stable companies like Coca-Cola and utility firms, dividends provide a predictable return, encouraging investors to hold shares long-term.
For instance, looking at Babble, Inc., a hypothetical company selling 200 shares and expecting profits of $15 million, $20 million, and $25 million over the next two years, the dividend policy is clear: all profits will be paid out as they occur. In such a case, the price an investor might be willing to pay for a share would be based on the present value of the expected dividend payouts. Since the company is set to be disbanded in two years, the investment would be seen as a short-term income generation opportunity.
Historical dividend trends in the S&P 500, as shown in Table 17.2, indicate that dividend policies can change over time. From the 1950s to 1980s, average annual dividends were about 4% of stock value, but by the 1990s, this rate had dropped to around 1% to 2%. Understanding these trends is crucial for senior management when setting a dividend policy that aligns with investor expectations and market norms.