Bennett Farm Equipment Sales, Inc., is in a
highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes
that strict adherence to that ratio would result in a fluctuating dividend and create
uncertainty for the firm’s stockholders. Therefore, the firm has declared a regular dividend
of $0.50 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.
a. Calculate the payout ratio for each year on the basis of the regular $0.50 dividend
and the cited EPS.
b. Calculate the difference between the regular $0.50 dividend and a 25% payout
for each year.
c. Bennett has established a policy of paying an extra dividend of $0.25 only when the
difference between the regular dividend and a 25% payout amounts 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?