Solved: Should the company follow the residual dividend policy, Finance Basics

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Should the company follow the residual dividend policy

Problem:

Capital budget    $10,000,000
Desired capital structure             40% Debt
60%    Equity
Expected net income                  $7,000,000
Outstanding shares                     5,000,000
Last annual dividend per share         $0.50

Question 1) What are the company's options for raising the money needed for the capital budget?

Question 2) Should the company follow the residual dividend policy? Why or why not?

Question 3) Which is better for the stockholder--cash dividends or stock repurchases? Why?

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Finance Basics: Should the company follow the residual dividend policy

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