Question

The capital budget of Creative Ventures Inc. is $1,000,000. The company wants to maintain a target capital structure that is 30% debt and 70% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

Answer 1

Answer:

$100,000

Explanation:

According to residual dividend policy, companies pay dividend from profits or retained earnings to shareholders after meeting all of its capital funding requirements according to prescribed debt / equity ratio.

As the Creative Ventures has capital budget of $1,000,000, 70% of which is to be funded via equity (profit / retained earnings), thus $700,000 is to be funded from equity.

Dividend: Net Income - Equity portion of capital funding

Dividend: $800,000 - $700,000

Dividend: $100,000