Question

Low-regular-and-extra dividen policy Bennett Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm as a target payout ratio of 25%, its board realizes that strict adherence to that ration would result in a fluctuating dividend and create uncertainty for the firm's stockholders. Therefore, the firm has declared a regular dividend of $.50 per share per year with extra cash dividends to be paid when earnings justify them. Earnings per share for the last several years are shown in the following table: Year EPS

A) 2015 $3.00
B) 2014 $2.40
C) 2013 $2.20
D) 2012 $2.80
E) 2011 $2.15
F) 2010 $1.97
a) Calculate the payout ration for each year on the basis of the regular $.50 dividend and cited eps.
b) Calculate the difference between the regular $.50 dividend and a 25% payout for each year.
c) Bennett has established a policy of paying an extra dividend of $.25 only when the difference between the regular dividend and a 25% payout amount to $1.00 or more. Show the regular and extra dividends in those years when an extra dividend would be paid. What would be done with the "extra" earnings that are not paid out?
d) The firm expects that future earnings per share will continue to cycle but will remain above $2.20 per share in most years. What factors should be considered in making a revision to the amount paid as a regular dividend? If the firm revises the regular dividend, what new amount should it pay?

Answer 1

Dividend policy calculations involved determining the payout ratio, the difference from target payout, and identifying years in which extra dividends would be issued by Bennett Farm Equipment Sales, Inc. Extra earnings could be reinvested or saved for future use.

Step-by-step explanation:

To address the student's question regarding dividend policy, we will calculate the payout ratio, the difference between regular dividends and the target payout, and analyze any extra dividends to be paid by Bennett Farm Equipment Sales, Inc. given the data on earnings per share (EPS) for several years.

1. Calculate the payout ratio for each year using the regular dividend of $.50 per share and each year's EPS.
2. Calculate the difference between the regular dividend of $.50 and what would be a 25% payout based on the EPS for each year.
3. Determine when extra dividends would be paid out based on the policy of paying an extra $.25 when the difference exceeds $1.00.

Regarding the extra earnings not paid out, they could be reinvested into the company, used to buy back shares, held as cash reserves, or allocated for potential future investment opportunities.

In considering a revision to the regular dividend, factors such as earnings stability, financial needs, investor expectations, and industry trends should be taken into account. If a new dividend amount is to be set, it should reflect the company's long-term earnings capacity while maintaining a degree of consistency to avoid uncertainty for investors.