The Dimples Golf Ball, Co. has paid a regular dividend of $0.20 quarterly for the last three years. The company has 2 million shares outstanding. Over the next year the company will have to spend $800,000 to service its debt and spend $200,000 in capital expenditures. The company has $500,000 of cash and cash equivalents. Over the next year how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $500,000 in cash at the end of the year?

Question

Quizplus · Accepted Answer

To continue to pay the same quarterly dividend of $0.20 per share for 2 million shares, the company will need to pay $0.20 x 2,000,000 = $400,000 every quarter or $1,600,000 annually.

The company's total cash outflows for the year will be $800,000 for debt service and $200,000 for capital expenditures, for a total of $1,000,000.

Assuming there are no other significant cash inflows, the company will need to generate $1,000,000 + $1,600,000 = $2,600,000 from operations to continue making the same dividend payments and still end up with $500,000 in cash at the end of the year.

Therefore, the best choice is D.