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A firm with uncertain earnings that has adopted a constant dividend payout policy will most likely...

A firm with uncertain earnings that has adopted a constant dividend payout policy will most likely have a stable dividend payout ratio, but unstable dollar dividends, over time.

True or false

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Answer #1

True.

For Instance, let's say, the Dividend Payout Ratio is 40% and this year the Earnings are 50 per share, the Dollar dividends will be 50 * 40% = 20 per share.

Now, next year lets say the earnings are 5 per share, the dividend payout is still 40% but this year the dollar dividend will be 5 * 40% = 2 per share.

Therefore because of the inconsistancy in the Earnings, the Dividend Payout Ratio may be consistent but the Dollar dividend are unstable.

So, the statement is true.

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