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23 December, 12:04

David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay

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  1. 23 December, 12:19
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    If the company follows the residual dividend policy, it is $50,000 in dividends.

    Explanation:

    Dividend is calculated by using the formula:

    Dividends = Net Income - Equity requirement

    where, Equity requirement = Capital budget (% Equity)

    = 500,000 (70%) = $350,000

    ∴ Dividends = 400,000 - 350,000

    = $50,000
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