Pate & Co.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

First, we need to calculate the total amount of funds required to maintain the target capital structure.

Debt = 15% x $3,000,000 = $450,000 
Equity = 85% x $3,000,000 = $2,550,000

Total funds required = Debt + Equity = $450,000 + $2,550,000 = $3,000,000

Next, we need to calculate the amount of funds available for distribution as dividends.

Funds available for distribution = Net income - Funds required = $3,500,000 - $3,000,000 = $500,000

Since the company follows a residual dividend policy, it will first invest in all available projects to meet its target capital structure and then distribute the remaining funds as dividends.

Therefore, the total dividend payment will be equal to the funds available for distribution, which is $500,000.

Hence, the best choice is C.

Pate & CoHas a Capital Budget of $3,000,000