Universal Utilities (U2) applies the low regular dividend plus extras policy whe

Question

Universal Utilities (U2) applies the low regular dividend plus extras policy when determining how much of its income will be paid out as dividends each year. U2’s policy states that the minimum dividend that will be paid each year is $0.50 per share. But, when net income is greater than $600,000, the total dividend will be increased by 25 percent of the amount that exceeds $600,000. The firm currently has 100,000 shares of stock outstanding. What will be the dividend per share if U2 earns (a) $760,000 and (b) $580,000?

Explanation / Answer

Dividend = 0.50 + 25% if income is greater than 600,000 / no. of shares

Part a)

Dividend per share = 0.50 + 0.25 x (760,000-600,000)/ 100,000

                                      = 0.50 + 0.25 x1.60

                                      = 0.90

Part b)

Income is lower than 600,000. So no additional dividend will be paid.

Dividend per share = 0.50 +0

                                      = 0.50

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