Stock price reactions to dividend announcements: The Wyoming Boot Co. has paid a regular dividend of $0.25 quarterly for the last several years. The company has 1 million shares outstanding. Over the next year the company will have to spend $600,000 to service its debt and spend $500,000 in capital expenditures. The company has $600,000 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 $250,000 in cash at the end of the year?

Question

Quizplus · Accepted Answer

To continue paying the same quarterly dividend payment over the next year, the total dividends paid would be:
4 x $0.25 x 1,000,000 shares = $1,000,000

In addition to servicing its debt and capital expenditures, the company must have $250,000 in cash at the end of the year, which means it needs to keep:
$600,000 - $600,000 - $500,000 - $250,000 = -$250,000

This means the company is short $250,000 in cash flow and must generate an additional $250,000 in cash from its operations.

Total cash provided from operations:
$1,000,000 + $250,000 = $1,250,000

Therefore, the correct answer is C.

Stock Price Reactions to Dividend Announcements: the Wyoming Boot Co