I am having trouble calculating the difference between residual policies and cash dividends. Please see attached file.
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
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?
Your workings are correct.
The difference between the two is that a residal dividend policy is a passive policy. You estimate the money ...
The solution explains how to calculate the dividend payment under a residual dividend policy.