Question

Fauver Industries plans to have a capital budget of $600,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $300,000. If the company follows the residual dividend model, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance? $660,000 $514,800 $600,600 $712,800 $580,800

Answer 1

Answer:

$660,000

Explanation:

Capital budget = $600,000 % Equity 60% Dividends to be paid $300,000

Required net income = Dividends + (Capital budget × % Equity)

60%×$600,000 +$300,000

=$ 360,000+ $300,000

$660,000