Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

Question

Nadia Dillon

Business

2 June, 23:45

Victor Rumsfeld Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?

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Alondra Wang · Answer 1

Total dividends will be zero since residual dividend policy gives a negative dividend of $200000

Explanation:

Following the residual dividend policy, the dividends payable to shareholders can be calculated with the below formula:

residual dividend = forecast net income - (equity percentage * capital requirement)

Residual dividend=$600000 - ($2000000*40%)

Residual dividend=$600000-$800000

Since dividends cannot be taken as negative figure, dividends is nil

Alternatively dividends can be reduced to available net income after payment of interest and taxes