Question

Getler Inc.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?

Answer 1

The question is missing below options:

a. $514,425 $162,901 b. $541,500 $171,475 c. $570,000 $180,500 d. $600,000 $190,000 e. $0 $200,000

The correct option is E, $0 dividend and new stock issue of $200,000.00

Step-by-step explanation:

Since the projected capital budget is $2,000,000,it should be funded funded by $1,200,000 equity($2000,000*60%) and $800,000 debt($2000,000*40%).

From the equity's point of view using residual policy, the excess of net income over equity counter funding of the project at hand ,should be paid as dividends,but in this case the amount of net income of $1000000 means that equity shareholders would have to contribute extra $200000($1200000-$1000000) rather than receive dividends from the company.

In essence, no dividends is to be paid rather new equity of $200000 is required .