Pate & 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

First, we need to calculate the funds available for dividends:

Funds available for dividends = Net Income - (Target Equity Ratio x Capital Budget) = 3,500,000 - (0.85 x 3,000,000) = $550,000

Next, we need to calculate the amount of debt required to maintain the target capital structure:

Debt required = Target Debt Ratio x Capital Budget = 0.15 x 3,000,000 = $450,000

Finally, we can calculate the total dividend payment:

Total dividend payment = Funds available for dividends - Debt required = $550,000 - $450,000 = $100,000

Therefore, the correct answer is C) $950,000.

Pate & Co Has a Capital Budget of $3,000,000