Use the information for the question(s)below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding.Luther is considering investing the cash in one-year treasury bills that are currently paying 5% interest,and then using the cash to pay a dividend next year.Alternatively,Luther can pay the cash out as a dividend immediately and the shareholders can invest in the treasury bills themselves.Assume that capital markets are perfect.
-If Luther decides to pay the dividend immediately the dividend per share will be closest to:
A)$1.05.
B)$5.25.
C)$5.00.
D)$4.75.

Question

Quizplus · Accepted Answer

If Luther decides to pay the dividend immediately, the total dividend amount will be $5 million. Dividing this by the 1 million shares outstanding gives a dividend per share of $5. Therefore, the closest answer choice is C.

As for the best choice, paying out the dividend immediately seems to be the better option as it allows shareholders to individually invest in treasury bills and potentially earn a higher return than if Luther invested the cash and then paid out a dividend next year. This also distributes the excess cash to shareholders immediately, potentially increasing their satisfaction with the company.

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