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Luther Industries has $5 million in excess cash and one million shares outstanding. Luther is considering investing the cash in one-year Treasury bonds that are currently paying 5% interest and then using the cash to pay a dividend next year. Alternatively, Luther can pay the cash out as a dividend immediately and the shareholders can invest in the Treasury bonds themselves. Assume that capital markets are perfect.
-If Luther decides to pay the dividend immediately, the dividend per share will be closest to:
A)$5.25.
B)$1.05.
C)$4.75.
D)$5.00.

Question

Quizplus · Accepted Answer

With $5 million in excess cash and one million shares outstanding, if Luther pays out the cash immediately as a dividend, each share would receive $5 million / 1 million shares = $5.00 per share.

Use the Information for the Question(s)below