a. Look up what payout ratio means and plug in the numbers given for 2011.
b. They paid a $1 dividend in 2011. They want to continue paying a constant dividend in the future. What don't you understand about keeping a $1 dividend constant?
c. Now you have to make a calculation. What is the dividend if they earn $3 and the want to distribute the same percentage of earnings in dividends as in 2011? Multiply your answer in a by $3.
d. Now this is tough. They want to go from $1 in 2011 to your answer in c by 2014. So the dividends in 2012 and 2013 will be incrementally larger than each previous year until they reach your answer in c in 2014. The partial adjustment can result in several correct answers. For examplle, $1, $1.10, $1.15 , $1.20
Or
$1, $1.05, $1.10, $1.20.
Or anything else such as 7 cent increments or something else.
Delta Corporation earned $2.50 per share during fiscal year 2011 and paid cash dividends of $1.00 per share. During the fiscal year that just ended on December 31, 2012, Delta earned $3.00 per share, and the firm's managers expect to earn this amount per share during fiscal years 2013 and 2014 as well.
a. What was Delta's payout ratio for fiscal year 2011?
b. If Delta's managers want to follow a constant dollar payout dividend policy, what divident per share will they declare for fiscal year 2012?
c. If Delta's managers want to follow a constant payout ratio dividend policy, what dividend per share will they declare for fiscal year 2012?
d. If Delta's managers want to follow a partial-adjustment strategy, with a target payout ratio equal to fiscal year 2011's, how could they change dividend payments during 2012, 2013, and 2014?
I just dont understand this part in corporate finance. This is one of my homework questions.
