D&P Co. has a capital budget of $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?
Answer: $500,000 The amount of new investment which must be financed with equity is:
$2,000,000 ´ 65% = $1300,000.
Since the firm has $1800,000 of net income& $1800,000 - $1300,000 = $500,000 will be left for dividends.