Jaguar, Inc. maintains a debt-equity ratio of.60 and follows a residual dividend policy. The company has after-tax earnings of $3,100 for the year and needs $3,000 for new investments. What is the total amount Jaguar will pay out in dividends for this year?

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Quizplus · Accepted Answer

Jaguar, Inc. needs $3,000 for new investments and maintains a debt-equity ratio of 0.60. This means for every $1 of equity, there is $0.60 of debt. Therefore, the equity portion needed for the investment is $3,000 / (1 + 0.60) = $1,875. The remaining earnings after funding the equity portion of the investment are $3,100 - $1,875 = $1,225, which will be paid out as dividends.