IndirecTV, Inc. currently has 10 million common stock shares outstanding. Over the next 3 years, the firm anticipates capital expenditures that will lead to volatility in discretionary cash flow. From Year 4 on, however, the firm anticipates stable income and discretionary cash flows. You have the following forecasts of management available:

$MYear :1

2

3

4+

Net Income20

20

18

22

Depreciation2

2

3

4

Capital Expenditures2

8

8

2

Working Capital0

0

0

0

Debt0

0

0

0

Last year's (Year 0's) dividend was $1.00 per share. Which of the following is the optimal dividend policy for this firm for Years 1-3 and 4+ based on the best practices we have studied? (DPS(t) = Dividend Per Share in Year t.)

To answer this question, you may find the following table helpful in framing your analysis:

Year:

0

1

2

3

Total Cum.

(Years 1-3)

4+

Discr. Cash Flow ($ M)20

14

13

47

24

Discr. Cash Flow/Share2.40

Dividend/Share$1.00

2.40

a.DPS(1) = 1.05; DPS(2) = 1.20; DPS(3) = 2.45; Total DPS for Years 1-3 = 4.70

b.DPS(1) = 1.25; DPS(2) = 1.75; DPS(3) = 2.25; Total DPS for Years 1-3 = 5.25

c.DPS(1) = 1.15; DPS(2) = 1.50; DPS(3) = 2.00; Total DPS for Years 1-3 = 4.65

d.DPS(1) = 1.15; DPS(2) = 1.50; DPS(3) = 2.05; Total DPS for Years 1-3 = 4.70

e.DPS(1) = 0.95; DPS(2) = 1.50; DPS(3) = 2.25; Total DPS for Years 1-3 = 4.70