Split-Div, Inc. has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter the company initiated a 2-for-1 stock split. What is the minimum quarterly dividend the company's board should approve to avoid sending a bad signal to the investors?

Question

Quizplus · Accepted Answer

After the 2-for-1 stock split, the company's total number of outstanding shares will double, but the total amount of earnings available for dividends will remain the same. Therefore, if the company continues to pay a quarterly dividend of $0.10 per share, the total amount of dividends paid out will also double. This might be seen as unsustainable or unnecessary by investors, particularly if the company's earnings have not increased proportionally. A minimum quarterly dividend of $0.05 per share would maintain the same total amount of dividends paid out per quarter as before the stock split, and is therefore a reasonable choice to avoid sending a bad signal to investors. Option A, $0.02 per share, is too low and may signal financial weakness; option C, $0.10 per share, is too high and may signal a lack of concern for financial prudence; option D, $0.20 per share, is too high and implies a doubling of both the dividend and the total amount of earnings available, which may not be sustainable.