Question

A firm expects to have net income of $5,000,000 during the next year. The company’s target capital structure is 35% debt and 65% equity. The company's director of capital budgeting has determined that the optimal capital budget for the coming year is $6,000,000. If SL Computer follows a residual distribution policy (with all distributions in the form of dividends) to determine the coming year’s dividend, then what is the firm’s expected dividend payments?

Answer 1

Answer:

$1,100,000

Explanation:

The firm expected to have 5,000,000 as net Income

Capital Structure; Debt=35% , Equity= 65%

$6,000,000 is determined to be the Optimal capital budget for the coming year

The firm’s expected dividend payments following a residual distribution policy is = Net Income – [Total Capital Budget x Equity Ratio]

Where Net Income =5,000,000 Total capital budget =6,000,000 Equity Ratio= 65%

Hence Total Dividend Payment = $5,000,000 – [$6,000,000 x 65%]

= $5,000,000 - $3,900,000

= $1,100,000

The firm’s expected dividend payments is = $1,100,000,