The Altern Music Co. earns $4.25 per share, has 70,000 shares outstanding and a capital budget of $200,000.
If Altern Music raises all of its funds internally and follows the "passive residual policy", what are the annual dividends per share?
Passive Dividend Policy:
The company pays dividends to its shareholders out of the profits generated during the fiscal period. The passive dividend policy insists on the payment of dividends only after the entire capital budget is financed by the earnings whereas the residual dividend policy insists on the payment of dividends after the amount of capital budget to the extent of the proportion of equity in the capital structure is financed by earnings.
Answer and Explanation:
Altern Music Co's annual dividends per share are $1.39.
Altern Music Co. has provided the following data:
- Earnings per share = $4.25
- Shares outstanding = 70,000 shares
- Capital budget = $200,000
- Annual dividends per share = (Earnings per share * Number of shares) - Capital budget / Number of shares
- Annual dividends per share = ($4.25 * 70,000 shares) - $200,000 / 70,000 shares
- Annual dividends per share = $97,500 / 70,000 shares
- Annual dividends per share = $1.39
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from Finance 101: Principles of FinanceChapter 16 / Lesson 1