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Alpha Graphics Press (AGP) uses the residual dividend approach to determine the company’s dividend payments. They...


Alpha Graphics Press (AGP) uses the residual dividend approach to determine the company’s dividend payments. They have a target debt-to-equity ratio of ½. Next year AGP plans a capital budget of $60 million and earnings of $50 million. How much will AGP pay in dividends next year? Show your work.
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Answer #1

Capital budget=60 million
Equity=2/3*60=40 million
Debt=1/3*60=20 million
Earnings=50 million

So, out of 50 million earnings, 40 million would be used as equity and the remaining 10 million would be paid out as dividends.

Hence, Dividends next year=10 million

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