Bloomington Homes needs $168 000 for new investments next year.The company has a debt-equity ratio of 0.55 and has a residual dividend policy.The after-tax earnings for the year that just ended were $247 500.How much of their annual earnings will the firm pay out in dividends?

Question

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The correct answer is A.The debt-to-equity ratio is 0.55, which means that the company has $0.55 of debt for every $1 of equity. The residual dividend policy means that the company will pay out all of its earnings after paying for new investments and interest on debt. The after-tax earnings for the year that just ended were $247,500. The company needs $168,000 for new investments next year. Therefore, the company will have $247,500 - $168,000 = $79,500 left over to pay out in dividends.

Bloomington Homes Needs $168 000 for New Investments Next Year