Question

Ring Technology has a capital budget of $875,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $575,000. If the company follows the residual dividend model, 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

Answer 1

$1,143,750

Step-by-step explanation:

Capital budget $875,000

Equity ratio 65%

Dividends to be paid $575,000

Required net income = Dividends + (Capital budget ×% Equity)

Hence:

Required net income

Dividends to be paid $575,000

Capital budget of $875,000

× Equity 65% $568,750

Net income $1,143,750

Therefore the net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance is $1,143,750