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) $297,500 B) $552,500 C) $697,500 D) $952,500 E) $1,250,000

Answer 1

Dividend paid=Net income-(Capital budget*Weight of equity)

400,000=Net income-(850,000*65%)

400,000=Net income-552,500

Net income=(400,000+552,500)

=$952,500