Pavlin Corp.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much will it pay in dividends or,alternatively,how much new stock must it issue? $\begin{array}{lll}& \text{ Dividends }& \text{ Stock Issued }\\ W.& \$514,425& \$162,901\\ \mathrm{X}.& \$541,500& \$171,475\\ \mathrm{Y}.& \$570,000& \$180,500\\ \mathrm{Z}.& \$0& \$200,000\end{array}$

A) Choice W
B) Choice X
C) Choice Y
D) Choice Z

Under a residual dividend policy, the company pays dividends from the leftover equity after all project capital needs are met. Pavlin Corp. needs $2,000,000 for its capital budget, with 40% ($800,000) coming from debt and 60% ($1,200,000) from equity. Since its forecasted net income is $1,000,000, which is less than the equity portion needed ($1,200,000), it cannot pay any dividends and must issue new stock to cover the shortfall of $200,000 ($1,200,000 - $1,000,000).