Capital budget $10,000,000
Desired capital structure 40% Debt
Expected net income $7,000,000
Outstanding shares 5,000,000
Last annual dividend per share $0.50
1) What are the company's options for raising the money needed for the capital budget?
2) Should the company follow the residual dividend policy? Why or why not?
3) Which is better for the stockholder--cash dividends or stock repurchases? Why?
The company has three choices to raise the money it needs for the capital budget: 1) raise it from debt, 2) raise the money from all equity, and 3) raise it from a mix of debt and equity.
However, the best option would be the mixture of debt and equity ...
The solution examines options for capital budget and residual dividend policy.