Question

Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $300,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out? Select the correct answer.

Answer 1

The multiple choices are

a. $240,000

b. $228,000

c. $216,600

d.$205,770

e. $0

The correct option is E,$0

Step-by-step explanation:

The funding required from equity is 40% of the projected capital budget of $2000,000 which is expected to be from the profit attributable to stockholders since new issue of shares is not contemplated.

In other words, dividends payable to shareholders is the net income less their counter funding of the project which is computed below:

residual dividends=net income-(equity%*capital outlay)

residual dividends=$300,000-(40%*$2000,000)

=$300,000-$800,000=$0

In essence the $300,000 is not even enough as funds expected from equity less alone paying excess as dividend