Question

Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out? Capital budget $1,025,000 % Debt 60% Net income (NI) $665,000
a.$316,200
b.$211,650
c.$234,600
d.$255,000
e.$193,800

Answer 1

Answer:

d. $255,000

Explanation:

Data provided

Net income = $665,000

Capital budget = $1,025,000

Debt = 60%

The calculation of total dividends is shown below:-

Total dividend (using residual dividend approach) = Net income - Equity

= $665,000 - ($1,025,000 × (1 - 0.60))

= $665,000 - ($1,025,000 × 0.40)

= $665,000 - $410,000

= $255,000

Total dividend to be paid by Torrence Inc. = $ 255,000