Question

Lumi Industries has RM6 million in excess cash and 1.2 million shares outstanding. Lumi is considering investing the cash in one-year Treasury bills that are currently paying 6% interest and then using the cash to pay a dividend next year. Alternatively, Lumi 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 Lumi invests the excess cash in Treasury bills, then what the dividend per share next year will be?

Answer 1

Luni industries has excess cash of RM 6 million, which it wants to invest in treasury bill for 1 year which pays the interst @ 6 %.

Here the amount the company will get after 1 year will be = pricipal investment + interest.

Here principal will be the cash available of 6 million, and rate is given as 6%, and period is 1 year.

Interest amount = Principal × Rate × period.

Interest amount = 6 million × 6% ×1.

Interest amount = RM 0.36 million.

Thus the company will get amount after 1 year will be = RM 6 million + RM 0.36 million. = RM 6.36 Million.

Now If Lumi invests the excess cash in Treasury bills, then what the dividend per share next year will be?.

Dividend per share =Amount of cash available for dividend / Number of share outstanding.

Dividend per share = RM 6.36 million / 1.2 million.

Dividend per share = RM 5.30

Thus the dividend per share next year will be = RM 5.3