1 2 3 4 5 Thereafter

Earnings 100 125 150 120 140 150+

Discretionary 50 70 60 20 15 50+

Cash Flow ___________________________________

A firm has 20 million common shares outstanding. It durrently pays out $150 per share per year in cash dividends on its common stock. Historically its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.

a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?

b. Recommend a rasonable dividend policy for paying out discrtionary cash flow in years 1 though 5.