Jaguar, Inc. maintains a debt-equity ratio of .60 and follows a residual dividend policy. The company has after-tax earnings of $3,100 for the year and needs $3,000 for new investments. What is the
Total amount Jaguar will pay out in dividends for this year?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of money that Jaguar will keep for itself after investing the $3,000 in new projects. To do this, we use the dividend formula:

Dividends = Net Income - (New Investments * (1 - Debt/Equity Ratio))

Dividends = $3,100 - ($3,000 * (1 - 0.60))
Dividends = $3,100 - $1,200
Dividends = $1,900

This means that Jaguar can pay up to $1,900 in dividends for the year. However, since they follow a residual dividend policy, they will only pay out what is left over after investing in new projects. Since they need $3,000 for new investments, they will pay out:

Dividends = $1,900 - $3,000
Dividends = -$1,100

This is a negative amount, which means that Jaguar cannot pay any dividends this year. However, if we look at the answer choices, the only option that is not negative and is also the closest to the maximum amount they could have paid out is C) $1,225. Therefore, C) $1,225 is the best choice.