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 $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Answer 1

Answer:

Total dividends will be zero since residual dividend policy gives a negative dividend of $200000

Explanation:

Following the residual dividend policy,the dividends payable to shareholders can be calculated with the below formula:

residual dividend =forecast net income -(equity percentage * capital requirement)

Residual dividend=$600000-($2000000*40%)

Residual dividend=$600000-$800000

Since dividends cannot be taken as negative figure,dividends is nil

Alternatively dividends can be reduced to available net income after payment of interest and taxes