Fauver Worldwide forecasts a capital budget of $650,000,and it wants to maintain a target capital structure of 40% debt and 60% equity.It also wants to pay a dividend of $225,000.If the company follows the residual dividend policy,how much net income must it earn to meet its capital requirements,pay the dividend,and keep the capital structure in balance?

Question

Quizplus · Accepted Answer

To calculate the net income required to meet the capital requirements, pay dividends, and keep the capital structure in balance using the residual dividend policy, we need to use the following formula:
Net Income = (Target Capital Structure × Total Capital Budget) − Dividends
= (0.4 × $650,000) + (0.6 × $650,000) - $225,000
= $260,000 + $390,000 - $225,000
= $425,000
Therefore, the company must earn a net income of $425,000 to meet its requirements. Option B is the closest to this amount.

Fauver Worldwide Forecasts a Capital Budget of $650,000,and It Wants