In 1991 a firm paid dividends of $6 million. Their target payout ratio is .4, their 1992 earnings are $18 million, and alpha or speed of adjustment is.7. Their dividends for 1992 would be

Question

Quizplus · Accepted Answer

The dividends for 1992 can be calculated as:
Dividends = Target Payout Ratio * Earnings
Dividends = 0.4 * $18 million
Dividends = $7.2 million

However, this is the total amount of dividends that can be paid out based on the target payout ratio. Since the question only asks for the dividends for 1992, we need to adjust this amount for any changes in earnings or dividend policy.

We are not given any information about changes in dividend policy, so we can assume that the target payout ratio of 0.4 still applies. However, we do know that the earnings for 1992 were $18 million. If the full $7.2 million in dividends were paid out, this would result in a payout ratio of:

Payout Ratio = Dividends / Earnings
Payout Ratio = $7.2 million / $18 million
Payout Ratio = 0.4

This matches the target payout ratio, so we can conclude that the full amount of dividends will be paid out for 1992. Therefore, the answer is:

Dividends for 1992 = $7.2 million, or $6.84 million rounded to the nearest hundred thousand.

The closest option is C: $6.84 million.

In 1991 a Firm Paid Dividends of $6 Million