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Residual Dividend Policy and Maximum Investment Funds for Sheffield, Inc.

Sheffield, Inc. predicts that earnings in the coming year will be $20 million. There are 8 million shares, and Sheffield maintains a debt-equity ration of 1.4.

A. Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

B. Suppose the firm uses a residual dividend policy. Planned capital expenditures total $40 million. Based on this information, what will the dividend per share be?

C. In part B, how much borrowing will take place? What is the addition to retained earnings?

D. Suppose Sheffield plans no capital outlays for this coming year. What will the dividend be under a residual policy? What will new borrowing be?

Solution Preview

A. Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

Maximum investment funds available= $20 million
This is equal to the earnings
Answer: $20 million

B. Suppose the firm uses a residual dividend policy. Planned capital expenditures total $40 million. Based on this information, what will the dividend per share be?

Residual dividend policy ...

Solution Summary

The following are calculated in this solution: maximum investment funds available without issuing new equity, dividend per share under residual dividend policy, addition to retained earnings, and borrowings.

$2.19