Question

Southern Cities Trucking Company has the following? five-year record of earnings per share displayed below. Which of the following procedures would produce higher dividends to stockholders over this? five-year period? ?(Click on the icon located on the? top-right corner of the data table below in order to copy its contents into a? spreadsheet.) Year EPS 2012 ?$1.35 2013 2.04 2014 0.91 2015 2.91 2016 0.69 a. Paying out dividends at a fixed ratio of 33?% of EPS. b. Paying out dividends at a fixed rate of ?$0.91 per share.

If they pay out dividends at a fixed ratio of

3333?%

of? EPS, the total of the dividends over the? 5-year period is

?$nothing.

Answer 1

Evaluation of option a)

Year	EPS	Dividend
2012	1.35	1.35 x 0.3333 = 0.45
2013	2.04	2.04 x 0.3333 = 0.68
2014	0.91	0.91 x 0.3333 = 0.303
2015	2.91	2.91 x 0.3333 = 0.969
2016	0.69	0.69 x 0.3333 = 0.23
	Total	= 2.63

Evaluation of option b)

Annual fixed dividend = $ 0.91 per share

Total dividend for 5 years = 0.91 x 5

= $ 4.55

Since total dividends in option b) are more than total dividens in option a), hence option b) must be chosen by the company to produce higher dividends to the shareholders.