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, when an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2000 and 2003 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, when an extra dividend equal to 50 percent of the earnings above $1.50 would be paid, the annual dividends for 2000 and 2003 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

To calculate the annual dividends for each year, we need to first determine if earnings exceeded $1.50 per share.

For 2000:
Earnings per share = $1.00
Since earnings did not exceed $1.50, the dividend payout is $0.25 per share.
Annual dividend = $0.25 x 1 share = $0.25

For 2003:
Earnings per share = $2.50
Amount above $1.50 per share = $2.50 - $1.50 = $1.00
50% of earnings above $1.50 = 0.5 x $1.00 = $0.50
Total dividend payout = $0.25 + $0.50 = $0.75 per share.
Annual dividend = $0.75 x 1 share = $0.75

Therefore, the annual dividends for 2000 and 2003 were $0.25 and $0.75, respectively. The best choice is B.

A Firm Has Had the Following Earnings History Over the Last