Question

Pizza Inc. had earnings of $1.00, $1.25, and $4.00 per share and a dividend policy that resulted in annual dividends per share of $0.40, $0.50, and $1.60 for the past three years. The company anticipates maintaining the same dividend policy this year and also anticipates an increase in earnings to $6.00 per share this year. What dividend do you expect Pizza Inc. to pay in the next year?

Answer 1

Expected Dividend = $2.40

Step-by-step explanation:

To find out the company dividend company policy, we have to compute the dividend payout ratio for each year:

Year 1 Year 2 Year 3

Earnings $1.00 $1.25 $4.00

Dividends $0.40 $0.50 $1.60

Payout (Div/Earnings) 40% 40% 40%

The company policy to pay dividend is 40% out of their total earnings as evident by the previous year dividends. The anticipates earnings for the upcoming year is $6.00, so we can calculate dividends by multiplying payout ratio of 40% to earnings:

Expected Dividend = 6 * 40%

Expected Dividend = $2.40