=+7 (Examination level) The retailers Elec Co. and Lighting are competitors in the electrical goods market. They are similar firms in many respects: profits per share have been very similar over the past 10 years, and are projected to be the same in the future; they both have (and have had) a 50 per cent debt to equity ratio; and they have similar invest-

ment needs, now and in the future. However they do differ in their dividend policies.

Elec Co. pays out 50 per cent of earnings as dividends, whereas Lighting has adopted a stable dividend policy. This is demonstrated in the following table.

Your Elec Co.

Lighting Earnings Dividend Earnings Dividend per share per share per share per share

×1 11 5.5p 11g 5.5p

× 2 16p 8.0p 17 6.25p

×3 13g 6.5p 11p 7.11p x4 20 10.0p 21p 8.1p

×5 10g 5.0g 9p 9.2p

×6 0

0 0

10.5p

×7 15p 7.5p 17p 11.9p X

25p 12.5g 24p 13.5g x 5 30p 15.0p 31p 15.4p

×10 35p 17.5 35p 17.5p