Sloburn Barbeques Inc.uses the residual dividend model to set its dividends.Selected financial information for Sloburn is provided in the table below.
Selected Financial Information
Sloburn Barbeques Inc.

How much additional funds did Sloburn need to borrow in order to finance its new investments?

Question

Sloburn Barbeques Inc.uses the residual dividend model to set its dividends.Selected financial information for Sloburn is provided in the table below.
Selected Financial Information
Sloburn Barbeques Inc.

How much additional funds did Sloburn need to borrow in order to finance its new investments?

Quizplus · Accepted Answer

The amount of new debt needed is: New Debt = Investments - New Equity New Equity is: New Equity = w_E × Investments So, New Debt = (1 - w_E) × Investments From the residual dividend model, we know: D_t = 11ea7fdb_fc4d_e4a8_a768_7b128715dbbf_TB2902_11 D_t × Shares Outstanding = Total Dividends Total Dividends = Net 11ea7fdb_fc4d_e4a9_a768_634838e85696_TB2902_11 - w_E × 11ea7fdb_fc4d_e4aa_a768_bfe576b88890_TB2902_11 11ea7fdb_fc4e_0bbb_a768_35c9409a5bac_TB2902_11 = 11ea7fdb_fc4e_0bbc_a768_f10d7da86e04_TB2902_11 11ea7fdb_fc4e_0bbd_a768_916cc0f04ce4_TB2902_11 = 11ea7fdb_fc4e_0bbe_a768_0fc42942a4be_TB2902_11 11ea7fdb_fc4e_0bbf_a768_6b977dd61729_TB2902_11 = $75 New Debt = (1 - 0.9) × $75 New Debt = $7.5 M