Asked by Amjad Alsrya on May 11, 2024
Verified
Ting Technology has a capital budget of $850,000,it wants to maintain a target capital structure of 35% debt and 65% equity,and it also wants to pay a dividend of $400,000.If the company follows a residual dividend policy,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?
A) $904,875
B) $952,500
C) $1,000,125
D) $1,050,131
Residual Dividend Policy
A strategy in which a company pays dividends to its shareholders from the residual or leftover equity once all project and operation costs have been met.
Target Capital Structure
The mix of debt, equity, and other securities that a company aims to hold to finance its operations and growth.
Capital Budget
The amount of money allocated for significant long-term investments or projects of a business.
- Determine how decisions regarding the capital structure affect dividend disbursements and financing needs.
- Grasp the concept of residual dividend policy and how it influences dividend distribution.
Verified Answer
CH
Courtney HardinMay 12, 2024
Final Answer :
B
Explanation :
Under a residual dividend policy, Ting Technology will fund its capital budget with its preferred capital structure first and pay out any leftover earnings as dividends. The capital budget is $850,000, with 35% financed by debt ($850,000 * 35% = $297,500) and 65% by equity ($850,000 * 65% = $552,500). To maintain the capital structure and pay a $400,000 dividend, the equity portion must cover both the equity part of the capital budget and the dividend, totaling $952,500 ($552,500 + $400,000). Therefore, the net income must be at least $952,500 to meet these requirements.
Learning Objectives
- Determine how decisions regarding the capital structure affect dividend disbursements and financing needs.
- Grasp the concept of residual dividend policy and how it influences dividend distribution.