Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
A) $240,000
B) $228,000
C) $216,600
D) $205,770
E) $0

Question

Quizplus · Accepted Answer

Under a residual dividend policy, the company pays dividends from the leftover equity after all project financing needs are met. Here, the company needs $2,000,000 for its capital budget, with 40% ($800,000) expected to come from equity according to its target capital structure. Since the forecasted net income ($600,000) is less than the equity portion needed for the capital budget, there would be no residual equity to pay out as dividends, resulting in $0 dividends.