Mike Haden, president of Haden Corporation, believes that it is a good practice for a company to maintain a constant payout of dividends relative to its earnings.

Last year, net income was $600,000, and the corporation paid $120,000 in dividends. This year, due to some unusual circumstances, the corporation had income of $1,600,000. Mike expects next year’s net income to be about $700,000. What was Haden Corporation’s payout ratio last year? If it is to maintain the same payout ratio, what amount of dividends would it pay this year? Is this necessarily a good idea—that is, what are the pros and cons of maintaining a constant payout ratio in this scenario?

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