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

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    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?

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    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.