Pavlin Corp.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much will it pay in dividends or,alternatively,how much new stock must it issue? $\begin{array}{lll}
& \text { Dividends } & \text { Stock Issued } \
W . & \$ 514,425 & \$ 162,901 \
\mathrm{X} . & \$ 541,500 & \$ 171,475 \
\mathrm{Y} . & \$ 570,000 & \$ 180,500 \
\mathrm{Z} . & \$ 0 & \$ 200,000
\end{array}$

Question

Pavlin Corp.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much will it pay in dividends or,alternatively,how much new stock must it issue? $\begin{array}{lll} 
& \text { Dividends } & \text { Stock Issued } \
W . & \$ 514,425 & \$ 162,901 \
\mathrm{X} . & \$ 541,500 & \$ 171,475 \
\mathrm{Y} . & \$ 570,000 & \$ 180,500 \
\mathrm{Z} . & \$ 0 & \$ 200,000
\end{array}$

Quizplus · Accepted Answer

Under a residual dividend policy, the company pays dividends from the leftover equity after all project capital needs are met. Pavlin Corp. needs $2,000,000 for its capital budget, with 40% ($800,000) coming from debt and 60% ($1,200,000) from equity. Since its forecasted net income is $1,000,000, which is less than the equity portion needed ($1,200,000), it cannot pay any dividends and must issue new stock to cover the shortfall of $200,000 ($1,200,000 - $1,000,000).

Pavlin Corp A)Choice W B)Choice X C)Choice Y D)Choice Z

Pavlin Corp A)Choice W
B)Choice X
C)Choice Y
D)Choice Z