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Reynolds Company dividend policy: Calculate amount, options, equity, residual

Reynolds Company is evaluating its dividend policy. Selected data for the company are shown below.

Capital budget $10,000,000
Desired capital structure 40% debt
60% equity
Expected net income $7,000,000
Outstanding shares 5,000,000
Last annual dividend per share $0.50

1. If the company follows a residual policy, how much will it pay out in dividends?
2. If the company decides to maintain last year's dividend, how much will it pay out in dividends this year?
3. What are the company's options for raising the equity needed for the capital budget?
4. Should the company follow the residual dividend policy? Why or why not?
5. Which is better for the stockholder--cash dividends or stock repurchases? Why?

Solution Preview

1. If the company follows a residual policy, how much will it pay out in dividends?

When a company follows a residual dividend policy, it will use net income for capital budget. If any net income is left after meeting the capital budget, it would pay dividends of that amount.
Capital budget is $10,000,000 and it will be financed 60% by equity
Equity needed = 6,000,000
Net Income = 7,000,000
Residual dividend = $1,000,000

2. If the company ...

Solution Summary

The solution explains some questions relating to amount of dividends to be paid and the financing of capital budget.

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