Question

Final earnings estimates for the Smithfield Meat Packing Company have been prepared for the CFO of the company and are shown in the following table. The firm has 4,000,000 shares of common stock outstanding. As assistant to the CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible policies:

a. A stable dollar dividend targeted at 30 percent of earnings over a 5-year period.

b. A small, regular dividend of $0.60 per share plus a year-end extra when the profits in any year exceed $18 million. The year-end extra dividend will equal 50 percent of profits exceeding $20 million.

c. A constant dividend payout ratio of 40 percent.

YEAR PROFITS AFTER TAXES

1 $12,000,000

2 $15,000,000

3 $19,000,000

4 $23,000,000

5 $25,000,000

Answer 1

Answer :

(a.) Calculation of A stable dividend per share :

Dividend per share each year over the 5-year period = [(Total Profit / Number of years) * Payout Ratio ] / Number of shares outstanding

= {[(12,000,000 + 15,000,000 + 19,000,000 + 23,000,000 + 25,000,000) / 5 ] * 30% } / 4,000,000

= {94,000,000 / 5} * 30% / 4,000,000

= 1.41 each year .

(b.) Below is the table showing Dividend per year :

Year	Dividend per share	Extra Dividend	Total Dividend
1	0.60	0	0.60
2	0.60	0	0.60
3	0.60	0	0.60
4	0.60	0.75 [(23,000,000 - 20,000,000) / 4,000,000]	1.35
5	0.60	1.25 [(25,000,000 - 20,000,000) / 4,000,000]	1.85

(c.) Below is the table showing Dividend per share :

Year 1	Profit After Taxes	Dividend (Profit after Taxes * 40%)	Dividend per share
1	12000000	4800000	1.20
2	15000000	6000000	1.50
3	19000000	7600000	1.90
4	23000000	9200000	2.30
5	25000000	10000000	2.50