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Fauver Industries plans to have a capital budget of $850,000.


Fauver Industries plans to have a capital budget of $850,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $225,000. If the company follows the residual dividend policy, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance? 


a. $584, 250 b. $615,000 c. $717,000

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Answer #1

Soln:

Residual Dividend= Net Income - (Target Equity Ratio* Capital Budget)

$225000= Net Income -(60%*$850000)

$225000= Net Income-$510000

Therfore Net Income = $735000

The Company should earn $ 717000 to meet its investment budget, pay dividend, and keep the capital structure in balance.

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