Question

​(Residualdividendpolicy​) ​FarmCo, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains after funding 50 percent of its planned capital expenditures. The firm tries to maintain a 50 percent debt and 50 percent equity capital structure and does not plan on issuing more stock in the coming year.​ FarmCo's CFO has estimated that the firm will earn $16 million in the current year.

a. If the firm maintains its target financing mix and does not issue any equity next​ year, what is the most it could spend on capital expenditures next year given its earnings​ estimate?

b. If​ FarmCo's capital budget for next year is $12 ​million, how much will the firm pay in dividends and what is the resulting dividend payout​ percentage?

Answer 1

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ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Z AutoSum Cut A Wrap Text Calibri 11 General E Copy Fill Merge & Center Insert Delete Format Paste B I U $ % , 000 Conditional Format Cell Sort & Find & Filter Select Format Painter Clear Formatting as Table Styles Alignment Clipboard Font Number Styles Cells Editing ffx DG541 CY CZ DB DC DD DE DF DG DH 533 534 535 EARNINGS = 16000000 536 50% TO BE RETAINED 8000000 537 8000000 [IN THE FORM OF RETAINED EARNINGS] SO EQUITY 538 8000000 [50% : 50%] DEBT = 539 540 CAPITAL BUDGET= 16000000 a 541 542 NOW IF 543 CAPITAL BUDGET = 12000000 544 EQUITY 50% = 6000000 545 546 16000000 EARNINGS 547 LESS INVESTMENT 6000000 548 DIVIDEND PAYOUT 10000000 62.50% [10000000/16000000] b 549 DIVIDEND PAYOUT = 550 551 DIV YIELDO DIR right coNvexity DGMbeta PV, FV, ANNUITY NAME clean port future INDEX YIELD bond portfolio RESI ex div DIV POLICY INTL CAP BUD LEASING cap stru WACC ferences 130% W X 08:33 6 T ENG 29-10-2019