Answer to Question #16042 in Economics of Enterprise for brit

Question

D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
Answer

$100,000

$200,000

$300,000

$400,000

$500,000

Answer 1

Answer: $500,000
The amount of new investment which must be financed with equity is:

$2,000,000 ´ 65% = $1300,000.

Since the firm has $1800,000 of net income& $1800,000 - $1300,000 = $500,000 will be left for dividends.


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