Question

Brock Brothers wants to maintain its capital structure which is 30 percent debt and 70 percent equity. The company forecasts that its net income this year will be $1,000,000. The company follows a residual distribution policy and anticipates a dividend payout ratio of 40 percent. What is the size of the company’s capital budget?

a) $600,000

b) $857,143

c) $1,000,000

d) $1,428,571

e) $2,000,000

Answer 1

The size of the company's capital budget is computed as shown below:

= (Net income - dividend) / equity percentage

= ($ 1,000,000 - 40%) / 0.70

= $ 600,000 / 0.70

= $ 857,143 Approximately

So, the correct answer is option b.

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