Lucky Mike's, Inc. has a target debt/equity ratio of 0.75. After-tax earnings for 2009 were $850,000 and the firm needs $1,150,000 for new investments. If the company follows a residual dividend policy, what dividend will be paid?

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Under a residual dividend policy, dividends are paid from leftover earnings after all profitable investment opportunities are funded. With a target debt/equity ratio of 0.75, the equity portion of the $1,150,000 investment is $657,143. Subtracting this from $850,000 earnings leaves $192,857 for dividends.