Dew Drop Inn, Inc.’s earnings per share over the last 10 years were the following:
|
|
YEAR |
|||||||||
|
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|
EPS
|
$1.70 |
$1.82 |
$1.44 |
$1.88 |
$2.18 |
$2.32 |
$1.84 |
$2.23 |
$2.50 |
$2.73 |
a. Determine annual dividends per share under the following policies:
i A constant dividend payout ratio of 40 percent (to the nearest cent).
ii A regular dividend of 80 cents and an extra dividend to bring the payout ratio to 40 percent if it otherwise would fall below.
iii A stable dividend that is occasionally raised. The payout ratio may range between 30 percent and 50 percent in any given year, but it should average approximately 40 percent.
b. What are the valuation implications of each of these policies?