Ting Technology has a capital budget of $850,000,it wants to maintain a target capital structure of 35% debt and 65% equity,and it also wants to pay a dividend of $400,000.If the company follows a residual dividend policy,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?

Question

Quizplus · Accepted Answer

Under a residual dividend policy, Ting Technology will fund its capital budget with its preferred capital structure first and pay out any leftover earnings as dividends. The capital budget is $850,000, with 35% financed by debt ($850,000 * 35% = $297,500) and 65% by equity ($850,000 * 65% = $552,500). To maintain the capital structure and pay a $400,000 dividend, the equity portion must cover both the equity part of the capital budget and the dividend, totaling $952,500 ($552,500 + $400,000). Therefore, the net income must be at least $952,500 to meet these requirements.

Ting Technology Has a Capital Budget of $850,000,it Wants to Maintain