Question

Please answer both A and B.

Residual dividend policy As president of Young's of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company's dividend policy. In fact, the stockholder has asked you to estimate the amount of the dividend that you are likely to pay next year. You have not yet collected all the information about the expected dividend payment, but you do know the following (1) The company follows a residual dividend policy (2) The total capital budget for next year is likely to be one of three amounts, depending on the results of capital budgeting studies that are currently under way. The capital expenditure amounts are $2.1 milion, $3.1 million, and $4.1 million (3) The forecasted level of potential retained earnings next year is $2.1 million (4) The target or optimal capital structure is a debt ratio of 40% You have decided to respond by sending the stockholder the best information available to you a. Compute the amount of the dividend for the amount of new common stock needed) and the dividend payout ratio for each of the three capital expenditure amounts b. Compare, contrast, and discuss the amount of dividends (calculated in part a) associated with each of the three capital expenditure amounts a. If the capital expenditure amount is $2.1 million, the amount of dividend the firm can pay is $ (Round to the nearest dollar)

Answer 1

a) when capital expenditure is $2,1 million no Debt Ratio is 40%. Total Retained earnings is $21 millio Since 10% of cap. ex can be finder through Debt ie 40%. on &2-1 million $0.84 __ met Only $1-26 million (2.1-8.84) has to be funded from Retained castingsten "Remaining Retained camings available 24 million - 1 $1.26 million! $0.84 million for dividend Day out ratio $0.84 million 404 4 21 หนัgn Ploo

5 when capital expenditure is $ 3-1 million 12 Retained earnings = $ 2.1 million - Total amount available $2.1 million cincluding debt) - To6 (gall $3-5 millim - Debt a 40% on 2-1 million _ 7*124 milionitio so se doka I 1 Amount available sor dividend z - Retained - Amount ташл9- сеd. forcape - Amount used for a lotal - Debt Дем алуу оf CaptX 1. Анализ All = 81 million - 1.24 mittion milling af 1.86 million

| Amountarailable for dividend = 2-1 million - 1.86 mithin youjilimbie 9 0-24 million ton Payout ratio 0-24 million 0100 24 million sa H043-% mütlimismo Not c) when capital expenditure is & - 4.1 million. down the 241 million can be met through Debt ie - $1.64 million can be met through Debt 1 A 11111 Remaining cap.ex to be met uw AS J milan 4.1 - 1.64 4 2 g 246 million

- Amount available with the company as retained earnings 2 & 2.1 million mil Additional money to be funded $2.46 millim 2.1 million 28028 0.36 millim. Comparism I capex Dividend payout ratio I a) 241 milline 084 millions 40%. = 34 milline 0.24 millions 11:43% - ) 4.1 millions * Additional money to be raised I through equity & 0.36 million.

- - - - If the capital expenditure is $2.1 million Company can pay dividend of an 40-84 million as indicated in point no a). bolumn babint. binū9) Denom