ACCA Strategic Professional · Advanced Financial Management · Financial strategy formulation
Marlo Inc. has 2 million shares in issue and expected earnings of $6 million. Its policy is to pay out residual earnings after funding all positive-NPV projects. This year it has projects requiring $4.5 million of investment and wants to keep its existing 100% equity-financed capital structure. What dividend per share does the residual dividend policy imply?
The dividend per share is $0.75. Under a residual policy, earnings of $6m first fund the $4.5m of investment, leaving $1.5m to distribute. Divided by 2 million shares, this gives $0.75 per share.
- A$0.75Correct
- B$3.00
- C$2.25
- D$0.00
Explanation
All investment is financed from equity, so retained earnings of $4.5m are used. Residual dividend = $6.0m - $4.5m = $1.5m. Per share = $1.5m / 2m = $0.75. Using $4.5m as the dividend gives $2.25, and paying all earnings gives $3.00.
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