Dreyer Manufacturing is expected to generate $800,000 in net Income over the nex

Question

Dreyer Manufacturing is expected to generate $800,000 in net Income over the next year. Dreyer has forecast a capital budget of $1,000,000, and it wishes to maintain its current capital structure of 40% debt and 60% equity. If the company follows a strict residual dividend policy, what dividend Is it expected to pay at the end of the year? $100,000 $200,000 $300,000 $400,000 $500,000 What is Dreyer Manufacturing?s expected dividend payout for the coming year? 10% 20% 25% 35% 50% Suppose Dreyer discovers that by the end of the year, its net income will be only $500,000. If Dreyer maintains its capital structure, what does the residual dividend model predict its dividend should be? $200,000 $100,000 $300,000 -$100,000 -$200,000 -$300,000

Explanation / Answer

1. Net Income = 800,000
Capital budget requirement = 1,000,000

Company would fulfill this requirement by 40% debt and 60% equity.
requirement fulfilled by debt = 400,000
requirement fulfilled by equity = 600,000
Residual income = Net income - requirement fulfilled by equity
   = 800,000-600,000 = 200,000
Since the company follows residual dividend policy, expected dividend to pay at the end of year = $200,000


2. Expected Dividend payout ratio = Expected Dividend / Net Income
= 200,000/800,000 =0.25
Hence the correct answer is 25%

3. Dividend (according to redidual dividend model) =Net Income - requirement fulfilled by equity
   = 500,000 - 600,000 = -100,000
Hence the correct answer is -$100,000     

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