A firm has had the following earnings history over the last five years: If the firm's dividend policy was to pay $0.25 per share each period except when earnings exceed $1.50, an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2012 and 2015 were ________.
A) $0.25 and $1.25, respectively
B) $0.25 and $0.75, respectively
C) $0 and $0.25, respectively
D) $0.25 and $0.25, respectively

Question

A firm has had the following earnings history over the last five years:  If the firm's dividend policy was to pay $0.25 per share each period except when earnings exceed $1.50, an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2012 and 2015 were ________.
A) $0.25 and $1.25, respectively 
B) $0.25 and $0.75, respectively 
C) $0 and $0.25, respectively 
D) $0.25 and $0.25, respectively

Quizplus · Accepted Answer

For 2012, earnings did not exceed $1.50, so the firm paid the regular dividend of $0.25 per share. Therefore, the annual dividend would be $0.25 per share.

For 2015, earnings exceeded $1.50 for the first time, so the firm paid the regular dividend of $0.25 per share plus an extra dividend equal to 50 percent of the earnings above $1.50. The excess earnings were $2.50 - $1.50 = $1.00 per share, so the extra dividend was $0.50 per share. Therefore, the annual dividend would be $0.25 regular dividend + $0.50 extra dividend = $0.75 per share.

A Firm Has Had the Following Earnings History Over the Last