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    Residual Policy vs. Cash Dividends

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    I am having trouble calculating the difference between residual policies and cash dividends. Please see attached file.

    Thank You!

    A company is evaluating its dividend policy. What would the differences be with a residual policy vs cash dividends?

    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

    If the company follows a residual policy, how much will it pay out in dividends?
    If the company decides to maintain last year's dividend, how much will it pay out in dividends this year?

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    Solution Preview

    Your workings are correct.

    The difference between the two is that a residal dividend policy is a passive policy. You estimate the money ...

    Solution Summary

    The solution explains how to calculate the dividend payment under a residual dividend policy.