capital budget of Creative Ventures Incis $1,000,000 The company wants to maintain a target capital structure that 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

Quizplus · Accepted Answer

The residual dividend policy states that dividends are paid out of the residual earnings after all capital expenditures and debt obligations have been met. In this case, the company has a capital budget of $1,000,000 and a target capital structure of 30% debt and 70% equity. This means that the company will need to raise $300,000 in debt and $700,000 in equity to finance its capital budget. The company forecasts that its net income this year will be $800,000. After paying its debt obligations, the company will have $500,000 in residual earnings. This means that the company will be able to pay a dividend of $500,000.

Capital Budget of Creative Ventures Incis $1,000,000 the Company Wants