Finance chaptet 18..... - 22274

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Chapter 18

B2.

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

  1. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?
  2. 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

Discretionary cash flow

50

70

60

20

15

50+ per year

 
Solution Description

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

 

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