& Co.has a capital budget of $3,000,000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3,500,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Question

Quizplus · Accepted Answer

Step 1: Calculate total equity requirement

Total capital budget = $3,000,000
Equity portion = 85%
Total equity requirement = 85% * $3,000,000 = $2,550,000

Step 2: Calculate total debt requirement

Total capital budget = $3,000,000
Debt portion = 15%
Total debt requirement = 15% * $3,000,000 = $450,000

Step 3: Calculate total dividends

Net income = $3,500,000
Reserve requirement = $2,550,000 - $450,000 = $2,100,000
Total dividends = Net income - Reserve requirement = $3,500,000 - $2,100,000 = $1,400,000

Step 4: Calculate per share dividend

Total dividends = $1,400,000
Number of outstanding shares = not given
Per share dividend = not enough information

Therefore, the total dividend payment will be $950,000 (Choice C).

& CoHas a Capital Budget of $3,000,000