Question

McCann Publishing has a target capital structure of 35% debt and 65% equity.This year's capital budget is $850,000 and it wants to pay a dividend of $400,000.If the company follows a residual dividend policy,how much net income must it earn to meet its capital budgeting requirements and pay the dividend,all while keeping its capital structure in balance?A) $904,875B) $952,500C) $1,000,125D) $1,050,131E) $1,102,638

Answer 1

Answer:

B) $952,500

Explanation:

Calculation for how much net income must it earn to meet its capital budgeting requirements and pay the dividend

Using this formula

Net income = Dividends + (Capital budget ×Equity)

Let plug in the formula

Net Income=$400,000+($850,000×65%)

Net Income=$400,000+$552,500

Net Income=$952,500

Therefore how much net income must it earn to meet its capital budgeting requirements and pay the dividend dividend,all while keeping its capital structure in balance is $952,500