The capital budget of Creative Ventures Inc.is $1,000,000.The company wants to maintain a target capital structure that is 30% debt and 70% equity.The company forecasts that its net income this year will be $800,000.If the company follows a residual dividend policy, what will be its total dividend payment?

Question

Quizplus · Accepted Answer

The correct answer is A.The residual dividend policy states that the dividend payment is equal to the net income minus the amount of funds needed to finance the capital budget. In this case, the capital budget is $1,000,000 and the net income is $800,000. Therefore, the dividend payment will be $800,000 - $1,000,000 = -$200,000. However, since dividends cannot be negative, the dividend payment will be $0.

The Capital Budget of Creative Ventures Inc