Question

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

Answer 1

Answer:

Rohter Galeano Inc.'s total dividend payment is $950,000

Explanation:

Capital Budget = $3,000,000

To be financed from Debt at 15% = $3,000,000 × 15% = $450,000

To be financed from Equity at 85% = $3,000,000 × 85% = $2,550,000

Net income forecast = $3,500,000.00

Capital Budget from Equity = $2,550,000.00

Dividend Payment = $3,500,000 - $2,550,000 = $950,000