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

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Your workings are correct.

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

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