Question: Alcoa recently announced a new dividend policy. The firm said it would pay a base cash dividend of 40 cents per common share each quarter. In addition, the firm said it would pay 30% of any excess in annual earnings per share above $6.00 as an extra year-end dividend.
1) If Alcoa earns $7.50 per share next year, what percentage of next year's earnings would it pay out as cash dividends under the new policy?
2) For what types of firms would Alcoa's new dividend policy be appropriate? Explain.