Paul Schwartz, president of Schwartz Corporation, believes that it is good practice to maintain a constant payout of dividends relative to profit. Last year, profit was $600,000, and the company paid $60,000 in dividends. This year, due to some unusual circumstances, the company had a profit of $2 million. Paul expects next year's profit to be about$700,000.
(a) What was Schwartz Corporation's payout ratio last year?
(b) If it is to maintain the same payout ratio, what amount of dividends would it pay this year?
(c) Is this a good idea? In other words, what are the pros and cons of maintaining a constant payout ratio?