Sinkmaster Corp settled a large lawsuit that caused earnings to be negative for the quarter. This
quarterly loss was the first in 22 years. In addition, the company has a record of 48 consecutive
quarters of dividend payments.
Which of the following is correct?
A) The clientele effect says that investor choice of investment vehicle is independent of dividend
policy and therefore the payment/omission of the dividend is immaterial.
B) The company cannot pay dividends this quarter since the company had no earnings.
C) The company can use cash generated through prior retention of earnings, or borrowed funds
to pay the dividend.
D) The company can omit the dividend; shareholders are always understanding about the
riskiness of business.
Question 2
You want to buy a Nissan 300Z on your 27th birthday. You have priced these cars and found that they currently sell for 25,000. You believe that the price will increase by 10 percent per year until you are ready to buy.
You can presently invest to earn 14 percent. If you just turned 20 years old, how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years?
A) 8,881.21
B) 4,540.14
C) 4,652.18
D) 4,239.56
E) 5,072.09
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