Abel Inc. applies the low regular dividend plus extras policy when determining how much of its income will be paid out as dividends each year. Abel's policy states that the minimum dividend that will be paid each year is $1.00 per share. But, when net income is greater than $80 million, the total dividend will be increased by 40 percent of the amount that exceeds $60 million. The firm currently has 10 million shares of stock outstanding. What will be the dividend per share if Abel earns $100 million?

Question

Quizplus · Accepted Answer

The extra dividend is calculated on the amount of net income exceeding $60 million. With a net income of $100 million, the excess is $40 million ($100 million - $60 million). 40% of this excess, or $16 million ($40 million * 0.40), will be paid out as extra dividends. With 10 million shares outstanding, this translates to an extra $1.60 per share ($16 million / 10 million shares). Adding this to the minimum dividend of $1.00 per share results in a total dividend of $2.60 per share.

Abel Inc Applies the Low Regular Dividend Plus Extras Policy When