Mortal Inc.expects to have a capital budget of $500,000 next year.The company wants to maintain a target capital structure with 30% debt and 70% equity, and its forecasted net income is $400,000.If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Question

Quizplus · Accepted Answer

Under the residual dividend policy, dividends are paid from the residual or leftover equity after all capital budget needs are met. The equity portion of the capital budget is 70% of $500,000, which is $350,000. With a net income of $400,000, the residual for dividends is $400,000 - $350,000 = $50,000.