Banerjee Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its forecasted net income is $550,000, and its board of directors has decreed that no new stock can be issued during the coming year. If the firm follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining the target capital structure?
A) $673,652
B) $709,107
C) $746,429
D) $785,714
E) $825,000

Question

Quizplus · Accepted Answer

Under the residual dividend policy, dividends are paid out from the residual or leftover equity after all project capital needs are met. With a target capital structure of 70% equity, the maximum capital budget is calculated by dividing the equity portion of net income by the equity percentage: $550,000 / 0.70 = $785,714.