302 Sheet math dividend policy

P13-7 Over the last 10 years, a firm has had the earn-
ings per share shown in the following table.
a.If the firm’s dividend policy were based on a constant payout ratio of 40%
for all years with positive earnings and 0% otherwise, what would be the
annual dividend for each year?
b.If the firm had a dividend payout of $1.00 per share, increasing by $0.10 per
share whenever the dividend payout fell below 50% for two consecutive
years, what annual dividend would the firm pay each year?
c.If the firm’s policy were to pay $0.50 per share each period except when
earnings per share exceed $3.00, when an extra dividend equal to 80% of
earnings beyond $3.00 would be paid, what annual dividend would the firm
pay each year?
d.Discuss the pros and cons of each dividend policy described in parts
a through c.
Ans:
Year Dividend Year Dividend
a.
2003 $0.10 2008 $1.28
2004 0.00 2009 1.12
2005 0.72 2010 1.28
2006 0.48 2011 1.52
2007 0.96 2012 1.60
b.
2003 $1.00 2008 $1.10
2004 1.00 2009 1.20
2005 1.00 2010 1.30
2006 1.00 2011 1.40
2007 1.00 2012 1.50
 (Continued)
Year Dividend Year Dividend

c.
2003 $0.50 2008 $0.66
2004 0.50 2009 0.50
2005 0.50 2010 0.66
2006 0.50 2011 1.13
2007 0.50 2012 1.30

d. With a constant-payout policy, if the firm’s earnings drop or a loss occurs the dividends will be low
or nonexistent. A regular dividend or a low-regular-and-extra dividend policy reduces owner
uncertainty by paying relatively fixed and continuous dividends.

12–7 Given the earnings per share over the period 1996–2003 shown in the following table,
determine the annual dividend per share under each of the policies set forth in parts a
through d. Year Earnings per share 2003$1.40 2002 1.56 2001 1.20 2000 0.85 1999 1.05
1998 0.60 1997 1.00 1996 0.44
a.Pay out 50% of earnings in all years with positive earnings
b.Pay $0.50 per share and increase to $0.60 per share whenever earnings per
share rise above $0.90 per share for two consecutive years.
c.Pay $0.50 per share except when earnings exceed $1.00 per share, in which
case pay an extra dividend of 60% of earnings above $1.00 per share.
d.Combine policies in partsb and c. When the dividend is raised (in part b ),
raise the excess dividend base (in part c ) from $1.00 to $1.10 per share.
e.Compare and contrast each of the dividend policies described in parts a through d.

Ans:
Year Dividend Year Dividend
a.
2005 $0.22 2009 $0.00
2006 0.50 2010 0.60
2007 0.30 2011 0.78
2008 0.53 2012 0.70
b.
2005 $0.50 2009 $0.50
2006 0.50 2010 0.50
2007 0.50 2011 0.60
2008 0.50 2012 0.60
c.
2005 $0.50 2009 $0.50
2006 0.50 2010 0.50
2007 0.50 2011 0.88
2008 0.50 2012 0.78
 2005 $0.50 2009 $0.50
2006 0.50 2010 0.62
2007 0.50 2011 0.88
2008 0.53 2012 0.78
e. Part a uses a constant-payout-ratio dividend policy, which will yield low or no dividends if earnings
decline or a loss occurs. Part b uses a regular dividend policy, which minimizes the owners’
uncertainty of earnings. Part c uses a low-regular-and-extra dividend policy, giving investors a stable
income which is necessary to build confidence in the firm. Part d still provides the stability of parts b
and c and provides an extra $0.04 per year.

12–8 Columbia Paper has the following stockholders’ equity account. The firm’s common
stock has a current market price of $30 per share.
Preferred stock $100,000
Common stock (10,000 shares at $2 par) 20,000
Paid-in capital in excess of par 280,000
Retained earnings 100,000
Total stockholders’ equity $500,000
a.Show the effects on Columbia of a 5% stock dividend.
b. Show the effects of (1) a 10% and (2) a 20% stock dividend.
c. In light of your answers to parts a and b, discuss the effects of stock divi- dends on
stockholders’ equity.
Stock dividend—firm
(a) 5% (b) (1) 10% (b) (2) 20%
Stock Dividend Stock Dividend Stock Dividend
Preferred stock $100,000 $100,000 $100,000
Common stock (xx,xxx shares
@$2.00 par) 21,0001 22,0002 24,0003
Paid-in capital in excess of par 294,000 308,000 336,000
Retained earnings 85,000 70,000 40,000
Stockholders’ equity $500,000 $500,000 $500,000
1
10,500 shares
2
11,000 shares
3
12,000 shares
c. Stockholders’ equity has not changed. Funds have only been redistributed between the
stockholders’ equity accounts.

12–9 Milwaukee Tool has the following stockholders’ equity account. The firm’s common
stock currently sells for $4 per share.
Preferred stock 100,000
Common stock (400,000 shares at $1 par) 400,000
Paid-in capital in excess of par 200,000
Retained earnings 320,000
Total stockholders’ equity $1,020,000
a.Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per
share.
b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.
c. Compare the effects in parts a and b.What are the significant differences
between the two methods of paying dividends?
Ans: a.

Cash Dividend
$0.01 $0.05 $0.10 $0.20
Preferred stock $ 100,000 $ 100,000 $100,000 $100,000
Common stock
(400,000 shares
@$1.00 par) 400,000 400,000 400,000 400,000
Paid-in capital in
excess of par 200,000 200,000 200,000 200,000
Retained earnings 316,000 300,000 280,000 240,000
Stockholders’ equity $1,016,000 $1,000,000 $980,000 $940,000

b.

Stock Dividend
1% 5% 10% 20%
Preferred stock $ 100,000 $ 100,000 $ 100,000 $ 100,000
Common stock
(xxx,xxx shares
@$1.00 par) 404,000 420,000 440,000 480,000
Paid-in capital in
excess of par 212,000 260,000 320,000 440,000
Retained earnings 304,000 240,000 160,000 0
Stockholders’ equity $1,020,000 $1,020,000 $1,020,000 $1,020,000

c.Stock dividends do not affect stockholders’ equity; they only redistribute retained earnings into
common stock and additional paid-in capital accounts. Cash dividends cause a decrease in retained
earnings, and hence in overall stockholders’ equity.