Fellingham plc has 20 million ordinary £1 shares in issue. No shares have been issued during the past four years. The business’s earnings and dividends record taken from the past financial statements showed:

Required:
Comment on the declared dividend policy of the business and its possible effects on both Fellingham plc and its shareholders, illustrating your answer with the information provided.

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Earnings per share Dividend per share Year 1 11.00p 10.00p Year 2 12.40p 10.90p Year 3 10.90p 11.88p Year 4 (most recent) 17.20p 12.95p At the annual general meeting for Year 1, the chairman indicated that it was the inten- tion to consistently increase annual dividends by 9 per cent, anticipating that, on average, this would maintain the spending power of shareholders and provide a modest growth in real income. In the event, subsequent average annual inflation rates, measured by the general index of prices, have been: Year 2 Year 3 Year 4 The ordinary shares are currently selling for 3.44, excluding the Year 4 dividend. 11% 10% 8%