Residual Dividend Policy
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Please see attached. Please show calculations.
Projected capital budget is $1,000,000, target capital structure is 30% debt, 20% preferred stock and 50% equity, and forecasted net income is $400,000. Please show calculations.
a. If the company follows a residual dividend policy, how much dividends will it pay?
b. How many shares must it sell, if it requires external equity and it can issue new stocks at $20 per share?
c. What is the main disadvantage of having a residual dividend policy?
d. Are high dividends always preferred to low dividends? Explain.
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Solution Summary
The solution explains the calculations and the disadvantages of residual dividend policy.
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Projected capital budget is $1,000,000, target capital structure is 30% debt, 20% preferred stock and 50% equity, and forecasted net income is $400,000. Please show calculations.
a. If the company follows a residual dividend policy, how much dividends will it pay?
In the residual dividend policy, the firm first sets aside the net income for capital investments. After that whatever amount is left is paid as ...
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