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16 January, 14:58

McCann Publishing has a target capital structure of 35% debt and 65% equity. This year's capital budget is $850,000 and it 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?

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  1. 16 January, 17:09
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    Answer: $952500

    Explanation: targeted equity ratio is 65% = 0.65

    Capital budget = $850000

    Dividend = net income - (target equity ratio * total budget)

    400000 = N - (0.65 * 850000)

    Make N the subject of formula

    Net income N = $952,500
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