Question

Residual Dividend Policy Example

GIVEN:
a-Need $5 million for new investments
b-Target capital structure: D/E=2/3 (2 portions financed with debt, 3 portions financed with equity)
c-Net Income = $4 million

Answer 1

The residual dividend policy example involves using net income to finance new investments and distributing any remaining earnings as dividends.

Step-by-step explanation:

To determine the residual dividend policy example, we need to consider the given factors:

a) The need for $5 million for new investments

b) The target capital structure of D/E=2/3

c) Net Income of $4 million

The residual dividend policy states that a firm first invests in all profitable projects and then distributes the remaining earnings as dividends. In this case, if the firm needs $5 million for new investments, it will first use the net income of $4 million to finance the new projects. If there are any remaining earnings after the investment, they can be distributed as dividends to the shareholders. The target capital structure of D/E=2/3 determines the mix of debt and equity used to finance the investments.