Question

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15 percent and the cost of new equity is 16 percent. If Wagner has $70 million of investment projects having expected returns greater than 15 percent, determine the total amount of dividends Wagner should pay.

Answer 1

Answer:

Wagner will pay 10 million in dividends

Explanation:

The company will use their retained earnings to finance their project and distribute dividends with the remaining amount.

Thats because the investment projects expect return greater than 15% therefore the manager will decide to maximize value of the share and reinvest the earnings to get a better cashflow in the future.

retained earings= 100,000,000 income - 20,000,000 dividends =

80,000,000 retained earnings

(70,000,000) investment

10,000,000  available for dividends.

Answer 2

Answer:

Wagner company should pay $10 million in dividend.

Explanation:

Given:

Last year earnings = $100,000,000

Last year dividends = $20,000,000

Anticipated Earnings this year = $80,000,000

Investment project = $70,000,00

The amount of dividends to be paid, under residual dividend policy is calculated as:

Dividend= Earnings - investment requrements.

Dividend = $80,00,000 - $70,000,000 = $10,000,000

Wagner company should pay $10 million in dividends