Answer No-1:

The Residual Theory of Dividends states that all available cash flow should be
invested in projects with a positive net present value. Then any money left
over should be paid out to stockholders in the form of a dividend so that no free
cash flow (FCF) is left. Since we are not given an investment opportunity set
in the case, it is not possible to say with 100% certainty that Lancaster is not
following this policy. However, given the stable and steady increase in
dividend payments, it is certainly unlikely to be the policy chosen by Lancaster.

Answer No -2:
A Constant Payout Ratio means the company will keep the ratio "DPS divided
by EPS" at the exact same level each year. Table 1 shows that although the
number has been consistent and stable over the last 5 years, it certainly is not
the same. Moreover, there are several drawbacks associated with the Constant
Payout Ratio policy and it is therefore not often used by firms.

Answer No -3:
The Fixed Dollar or "Regular" dividend payment policy maintains that the firm
would pay the exact same dollar amount every dividend payment period and
would only increase the dividend payment when it was very certain that the
new, higher dividend could be sustained in the long run as subsequent dividend
cuts send a severely negative signal to the market. In the case of Lancaster
Colony, the dividend payment amount is clearly different each year, so this
policy is not being followed.

Answer No -4:
The Low Regular and Extra Dividend policy holds that the firm will pay the
same dollar dividend over the first three quarters (dividends in the US are
typically paid every quarter, not just at year's end), then pay a fourth quarter
dividend that is at least the same as, but likely higher than that paid for each of
the first three quarters. The amount of the yearend dividend is a function of
how well the company has done during the year and a function of their
investment opportunity set in the near future. Although the data given in the
case does not breakdown dividend payments by quarter, it is very likely that
Lancaster follows this policy coupled with the very conscience decision to
ensure that the annual amount of dividends continues to increase each year.
We can also safely assume that both the firm's investment opportunity set and
how well they performed have also been taken into consideration given that
their dividends do not always increase at the same rate or by the same dollar
amount.
Answer No -5&6:
If Lancaster cut its dividend for the first time in 39 years, it would certainly
send a negative signal to the market causing the stock price to drop. However,
Lancaster could mitigate this reaction by coupling their dividend cut
announcement with an explanation that the reason for the cut is to allow the
company to earn an even greater rate of return 58 by investing in internal
projects that are highly profitable. Even still, the investor base or investor
composition might change from income seeking conservatives to more
aggressive growth-oriented investors. This will cause extra volatility in
Lancaster's stock as investors buy and sell their shares to transfer ownership.