Question

Mercury satellite corporation earned 25 million for the fiscal year ending yesterday. The firm's policy is to pay out 40 percent of its earnings as dividends. The remaining 60 percent of earnings is retained by the company for use in projects. The company has 2.9 million shares of common stock outstanding. The current stock price is 109. The historical return on equity (ROE) of 11 percent is expected to continue in the future. What is the amount of dividends that will be paid out by the company?

1) 10 million
2) 15 million
3) 20 million
4) 25 million

Answer 1

The Mercury Satellite Corporation will distribute 10 million in dividends, which represents 40% of its yearly earnings. This approach follows a historical trend of companies balancing dividend payouts with reinvestment in the business.

Step-by-step explanation:

The Mercury Satellite Corporation will pay out 10 million in dividends for the fiscal year ending yesterday, following its policy of paying out 40 percent of its earnings. With a net income of 25 million, the calculation for dividends is straightforward: 25 million multiplied by 40 percent (0.40), resulting in a total of 10 million paid out to shareholders.

This payout reflects the company's commitment to returning a portion of its profits to its shareholders while retaining the majority for reinvestment and growth. This practice of retaining earnings is common among companies that are focused on pursuing new projects or expansion and aligns with historical data on dividend trends among S&P 500 companies, where dividends as a percentage of stock value have varied over the decades.