XYZ Co. has the following quarterly earnings projections: 1st quarter $25,000 loss; 2nd quarter + $50,000; 3rd quarter + $175,000; 4th quarter + $115,000. The retention ratio is 40% and the
Company follows a cyclical dividend policy. What is the dividend for the 4th quarter?

Question

Quizplus · Accepted Answer

First, we need to calculate the total earnings for the year: 
- Q1: -$25,000
- Q2: +$50,000
- Q3: +$175,000
- Q4: +$115,000 
Total earnings: $315,000

Next, we need to calculate the total amount of earnings that will be retained: 
Retained earnings = Total earnings x Retention ratio 
Retained earnings = $315,000 x 0.4 = $126,000

The retained earnings will be used to finance future growth or to pay off debt.

Finally, we can calculate the amount of dividend for the 4th quarter:

Dividend = (Earnings for the quarter - Retained earnings from the previous quarters) x Cyclical dividend factor

For the 4th quarter: 
- Earnings: +$115,000 
- Retained earnings from the previous quarters: $126,000 
- Cyclical dividend factor: 1.2 (based on the fact that the company follows a cyclical dividend policy)

Dividend = ($115,000 - $126,000) x 1.2 = $-11,000 x 1.2 = -$13,200

Note that the dividend is negative, which means that the company will not pay a dividend for the 4th quarter. Instead, it will retain those earnings for future growth or debt repayment. Therefore, the correct choice is D.

XYZ Co Has the Following Quarterly Earnings Projections: 1st Quarter $25,000