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

Question

Quizplus · Accepted Answer

To maintain the capital structure, 60% of the $650,000 capital budget should be financed with equity, which is $390,000. Adding the $225,000 dividend, the total net income required is $615,000.

Fauver Industries Plans to Have a Capital Budget of $650,000