Question

Starbucks has a capital budget of $15,000,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $3,500,000. If Starbucks follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend while at the same time keeping its capital structure in balance?Answer choices:a. $15,750,000b. $7,500,000c. $9,750,000d. $13,250,000

Answer 1

Answer:

d. $13,250,000

Explanation:

Required net income = Dividends + (Capital budget × % Equity)

                                   = $3,500,000 + ($15,000,000 × 0.65)

                                   = $13,250,000

Therefore, The net income must it earn to meet its capital budgeting requirements and pay the dividend while at the same time keeping its capital structure in balance is $13,250,000.