Badir Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm has a target payout ratio of 25 percent, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm's stockholders. Therefore, the firm has declared a regular dividend of US$0.50 per share per year with extra cash dividends to be paid when earnings justify them. Earnings per share for the last several years are as follows.
Year EPS Year EPS
2012.........US$3.00...........2009..........US$2.80
2011................2.40..........2008................2.15
2010...............2.20..........2007................1.97
a. Calculate the payout ratio for each year on the basis of the regular US$0.50 dividend and the cited EPS.
b. Calculate the difference between the regular US$0.50 dividend and a 25 percent payout for each year.
c. Badir has established a policy of paying an extra dividend of US$0.25 only when the difference between the regular dividend and a 25 percent payout amounts to US$1.00 or more. Show the regular and extra dividends in those years when an extra dividend would be paid. What would be done with the 'extra' earnings that are not paid out?
d. The firm expects that future earnings per share will continue to cycle but will re­ main above US$2.20 per share in most years. What factors should be considered in making a revision to the amount paid as a regular dividend? If the firm revises the regular dividend, what new amount should it pay?