Rohter Galeano Inc.is considering how to set its dividend policy.It has a capital budget of $3, 000, 000.The company wants to maintain a target capital structure that is 15% debt and 85% equity.The company forecasts that its net income this year will be $3, 500, 000.If the company follows a residual dividend policy, what will be its total dividend payment?

Question

Quizplus · Accepted Answer

The amount of new investment which must be financed with equity is:
$3, 000, 000 ×85% = $2, 550, 000.Since the firm has $3, 500, 000 of net income, $950, 000 = $3, 500, 000 - $2, 550, 000 will be left for dividends.