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

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

Quizplus · Accepted Answer

To determine the dividends paid for each year, we need to first identify the earnings for each year and then determine whether an extra dividend will be paid based on the earnings exceeding $1.50 per share.

Using the earnings history provided, we have:

- Year 1: $1.00 per share
- Year 2: $1.50 per share
- Year 3: $1.25 per share
- Year 4: $1.75 per share
- Year 5: $1.50 per share

For Year 1, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

For Year 2, the earnings do exceed $1.50, so an extra dividend will be paid equal to 50% of the earnings above $1.50. In this case, the excess earnings are $0. So the total dividend paid is only the regular dividend of $0.25 per share, resulting in an annual dividend of $0.25 per share.

For Year 3, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

For Year 4, the earnings do exceed $1.50, so an extra dividend will be paid equal to 50% of the earnings above $1.50. In this case, the excess earnings are $0.25 per share (earnings of $1.75 per share minus $1.50 per share threshold). So the extra dividend is $0.125 per share (50% of $0.25 per share) in addition to the regular dividend of $0.25 per share. This results in an annual dividend of $0.375 per share.

For Year 5, the earnings do not exceed $1.50, so the regular dividend of $0.25 per share is paid. This results in an annual dividend of $0.25 per share.

Therefore, the annual dividends for 2000 and 2003 are $0.25 per share and $0.75 per share, respectively. The correct answer is B.

A Firm Has Had the Following Earnings History Over the Last