If Luther invests the excess cash in Treasury bills,then the dividend per share next year will be closest to:

Question

Quizplus · Accepted Answer

Investing excess cash in Treasury bills will increase the interest income of the company. Assuming the interest rate on Treasury bills is 5%, the interest income on $750,000 will be $37,500. Dividing this by the number of shares outstanding (7,000), we get an increase in dividend per share of approximately $5.36. However, since the company wants to maintain a dividend payout ratio of 60%, the actual increase in dividend per share will be 60% of $5.36 or $3.22. Adding this to the current dividend of $2.03, we get a new dividend per share of approximately $5.25 ($2.03 + $3.22 = $5.25). Therefore, the closest answer is choice B.

If Luther Invests the Excess Cash in Treasury Bills,then the Dividend