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

Answer:

Expected Dividend = $2.40

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