SiriusXM, Inc. currently has 5 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: $ M Year : 1 2 3 4+ Net Income 10 10 8 14 Depreciation 1 1 1 2 Capital Expenditures 1 4 4 1 ?Working Capital 0 0 0 0 ?Debt 0 0 0 0 Last year's (Year 0's) dividend was $0.75 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) 10 8 7 25 13 Discr. Cash Flow/Share 2.60 Dividend/Share $0.75 2.60

a. DPS(1) = 1.05; DPS(2) = 1.30; DPS(3) = 2.65; Total DPS for Years 1-3 = 5.00

b. DPS(1) = 0.70; DPS(2) = 1.80; DPS(3) = 2.50; Total DPS for Years 1-3 = 5.00

c. DPS(1) = 1.25; DPS(2) = 1.75; DPS(3) = 2.50; Total DPS for Years 1-3 = 5.50

d. DPS(1) = 1.10; DPS(2) = 1.50; DPS(3) = 2.25; Total DPS for Years 1-3 = 4.85

e. DPS(1) = 1.10; DPS(2) = 1.50; DPS(3) = 2.40; Total DPS for Years 1-3 = 5.00