Sweetums Inc., a confectioner best known for its mint ogre balls, uses the residual dividend model to set its dividends. Selected financial information for Sweetums Inc. is provided in the table below. Given the investment plan summarized in the table, how much new debt will it have to take on in order to maintain its target capital structure? Selected Financial Information
Sweetums Inc.
$$\begin{array} { | c | c | }
\hline \text { Net income } & \$ 90 \text { million } \
\hline \text { Equity capital structure weight } & 0.60 \
\hline \text { Investments } & \$ 100 \text { million } \
\hline \text { Dividends } & \$ 0.30 \text { per share } \
\hline
\end{array}$$

Question

Sweetums Inc., a confectioner best known for its mint ogre balls, uses the residual dividend model to set its dividends. Selected financial information for Sweetums Inc. is provided in the table below. Given the investment plan summarized in the table, how much new debt will it have to take on in order to maintain its target capital structure? Selected Financial Information
Sweetums Inc.
$$\begin{array} { | c | c | } 
\hline \text { Net income } & \$ 90 \text { million } \
\hline \text { Equity capital structure weight } & 0.60 \
\hline \text { Investments } & \$ 100 \text { million } \
\hline \text { Dividends } & \$ 0.30 \text { per share } \
\hline
\end{array}$$

Quizplus · Accepted Answer

Sweetums Inc. uses the residual dividend model, meaning dividends are paid from residual earnings after funding investments. With a 60% equity weight, $60 million of the $100 million investment is funded by equity. The remaining $40 million must be funded by debt to maintain the target capital structure.

Sweetums Inc A)$30 Million B)$40 Million C)$60 Million D)$90 Million E)$100 Million

Sweetums Inc A)$30 Million
B)$40 Million
C)$60 Million
D)$90 Million
E)$100 Million