XX operates in the mining industry and has 2 million shares outstanding. It is considering two alternative policies:
1. A constant payout ratio policy, where 60% of earnings are paid out in cash dividends except when a loss is made, and
2. A low regular and extra policy, where a cash dividend of $0.60 is paid will be paid each period plus a year end special cash dividend when earnings in a year exceed $3,000,000. The special dividend will equal 70% of earnings above $3,000,000.
Earnings are expected to be $4,000,000 next year and $2,000,000 the year after.
a) Determine the yearly dividend per share to be paid in each of the two years under each of the alternative policies.
b) Which of the two policies do you recommend and why?
 

password : shiv


 

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