P&D Co. has a capital budget of $1,000,000. The company wants to maintain a target capital structure which is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Question

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The residual dividend policy implies that the company will pay dividends only after meeting its investment needs. The company's target capital structure is 30% debt and 70% equity, which means that it will need to raise $300,000 in debt and $700,000 in equity to maintain its target capital structure. The company has a capital budget of $1,000,000, which means that it will have $300,000 left over after meeting its investment needs. This $300,000 will be available for dividends, so the company's total dividend payment will be $300,000.

P&D Co Has a Capital Budget of $1,000,000