Rohter Galeano Inc.is considering how to set its dividend policy.It 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?
A) $205,000
B) $500,000
C) $950,000
D) $2,550,000
E) $3,050,000

Question

Quizplus · Accepted Answer

According to the residual dividend policy, the dividend payment will be the residual or leftover amount after fulfilling the capital budget and maintaining the target capital structure.

First, let's calculate the amount of debt and equity required to maintain the target capital structure:
Debt = 15% x $3,000,000 = $450,000
Equity = 85% x $3,000,000 = $2,550,000

Next, we need to calculate the amount of retained earnings required to fulfill the capital budget:
Retained Earnings = Net Income - Dividend Payment
Dividend Payment = Net Income - Retained Earnings
Retained Earnings = $3,000,000 - $450,000 = $2,550,000
Dividend Payment = $3,500,000 - $2,550,000 = $950,000

Therefore, the total dividend payment under the residual dividend policy will be $950,000, which is option C.