Question: Cracus Company has a capital budget of $10 million. It wants to maintain a capital structure of 55 percent debt and 45 percent equity. This year it expects net income of $7 million. The company has 40 million authorized shares, and 20 million are outstanding. Last year the company paid a dividend of $0.30 per share.
a. How much equity is required?
b. How much will the company pay in dividends if it follows a residual dividend policy?
c. How much external equity will the company require if it pays the same dividend as last year?
d. What are 3 advantages of following a residual dividend policy?
e. What are 3 disadvantages of following a residual dividend policy?