You are analyzing the dividend policy of Conrail, a major railroad, and you have collected the following information from the past five years.
|
Year
|
Net Income (Million)
|
Capital Expenditure (Million)
|
Depreciation (Million)
|
Noncash Working Capital (Million)
|
Dividends (Million)
|
|
1991
|
$240
|
$314
|
$307
|
$35
|
$70
|
|
1992
|
$282
|
$466
|
$295
|
$(110)
|
$80
|
|
1993
|
$320
|
$566
|
$284
|
$215
|
$95
|
|
1994
|
$375
|
$490
|
$278
|
$175
|
$110
|
|
1995
|
$441
|
$494
|
$293
|
$250
|
$124
|
The average debt ratio during this period was 40 percent, and the total noncash working capital at the end of 1990 was $10 million.
a. Estimate how much Conrail could have paid in dividends during this period.
b. If the average return on equity during the period was 13.5 percent, and Conrail had a beta of 1.25, what conclusions would you draw about their dividend policy? (The average Treasure bond rate during the period was 7 percent, and the average return on the market was 12.5 percent during the period.)