Use the Information for the Question(s) Below

question 6

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:

Safety Inventory

Additional stock that a company holds to prevent stockouts and ensure product availability, acting as a buffer against demand fluctuations.

Holding Cost

The expenses associated with keeping inventory in storage, including warehousing costs, insurance, depreciation, and potential obsolescence.

Standard Deviation

Standard deviation measures the amount of variation or dispersion of a set of values, indicating how much they deviate from the average.

Safety Inventories

Stocks of products or materials kept on hand to protect against uncertainties in supply or demand.