Technology has a capital budget of $850,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $400,000.If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?

Question

Quizplus · Accepted Answer

To maintain the capital structure, 65% of the capital budget should be funded by equity: 0.65 * $850,000 = $552,500. The net income must cover this equity portion plus the dividend: $552,500 + $400,000 = $952,500.

Technology Has a Capital Budget of $850,000, It Wants to Maintain