Use the Information for the Question(s)below

question 55

Multiple Choice

Use the information for the question(s) below.
Luther Industries has $5 million in excess cash and 1 million shares outstanding.Luther is considering investing the cash in one-year treasury bills 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 bills themselves.Assume that capital markets are perfect.
-If Luther invests the excess cash in treasury bills,then the dividend per share next year will be closest to:

• A)$5.00.
• B)$5.25.
• C)$4.75.
• D)$1.05.

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Definitions:

Perfect Information

A scenario in decision theory or economics where all participants have access to all relevant information.

Perfect Information

A condition in decision making where all parties have full and identical information relevant to the decision.

Expected Payoff

The anticipated return of an investment or decision under uncertainty, calculated as a weighted average of all possible outcomes.

Posterior Probabilities

The probabilities of different possible outcomes or hypotheses being true after considering new evidence, rephrasing the concept in a broader context.