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CS Executive · Corporate Accounting and Financial Management · Dividend Decisions

Kaveri Ltd has 5 lakh equity shares and EPS of ₹12. Its dividend policy is a constant payout of 40% of earnings. Next year EPS is expected to fall to ₹9 and the company's profit is ₹45 lakh. Which statement correctly describes the dividend per share under this policy and under a stable (constant) DPS policy continuing last year's ₹4.80 DPS?

Under a constant 40% payout, next year's dividend is 40% of ₹9 EPS, which is ₹3.60 per share. Under a stable DPS policy, the company would continue paying ₹4.80 despite lower earnings. Constant payout varies with profits, while stable DPS smooths dividends.

  1. AConstant payout gives DPS ₹3.60; stable DPS policy keeps ₹4.80Correct
  2. BConstant payout gives DPS ₹4.80; stable DPS policy gives ₹3.60
  3. CConstant payout gives DPS ₹3.60; stable DPS policy gives ₹3.60
  4. DConstant payout gives DPS ₹9.00; stable DPS policy keeps ₹4.80

Explanation

Last year's DPS = 40% x 12 = ₹4.80. Next year, EPS = 45 lakh/5 lakh = ₹9; constant payout gives 40% x 9 = ₹3.60. A stable DPS policy maintains ₹4.80 despite lower earnings, which implies a payout of about 53%. Constant payout makes dividends fluctuate with earnings.

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