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Rohter Galeano Inc. is considering how to set its dividend policy. It has a capital budget of $3,000,000. The company wants to maintain a target capital structure that is 15% debt and 85% equity. The company forecasts that its net income this year will be $3,500,000. If the company follows a residual dividend policy, what will be its total dividend payment? $205,000 $500,000 $950,000 $2,550,000 $3,050,000

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ahmedgodtrust

Answer:

Net income = $3,500,000

Investment in equity = 85% x $3,000,000 = $2,550,000

Residual dividend = $3,500,000 - $2,550,000

Residual dividend = $950,000

The correct answer is C

Explanation:

Residual dividend is the difference between net income and investment in equity. Net income is $3,500,000 while investment in equity is $2,550,000.

The excess of net income over investment in equity gives the residual dividend. The investment in equity is calculated as equity ratio in the capital structure (85%) multiplied by the capital budget of $3,000,000.

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