Companies following the residual dividend policy use internally generated equity to finance new projects. They pay dividends only out of what is left after all capital requirements have been met, so they declare dividends only if there is enough money left over after all operating and expansion expenses are met. This answer is the difference between the investments generating more than the cost of capital and the funds available. ($200,000 + $350,000 + $570,000 - $1,000,000). In this calculation, not only would there be no funds available for dividends, they are actually $120,000 short of the money needed for the total investment.
Companies following the residual dividend policy use internally generated equity to finance new projects. They pay dividends only out of what is left after all capital requirements have been met, so they declare dividends only if there is enough money left over after all operating and expansion expenses are met. If Mason maintains the 40% debt / 60% equity relationship, then 60% of the chosen investments will need to come from the $1,000,000 available funds. The investments chosen should provide an IRR greater than the cost of capital of 11%. The chosen investments should be A, B, and C. The total investment in these projects is $1,120,000. Multiply that by the portion financed through the funds available (60%) and you have $672,000. The remaining funds will be available for dividends. $1,000,000 ? $672,000 = $328,000.
Companies following the residual dividend policy use internally generated equity to finance new projects. They pay dividends only out of what is left after all capital requirements have been met, so they declare dividends only if there is enough money left over after all operating and expansion expenses are met. This is the difference between the funds available and the cost of project B. See correct answer for detailed calculations.
Companies following the residual dividend policy use internally generated equity to finance new projects. They pay dividends only out of what is left after all capital requirements have been met, so they declare dividends only if there is enough money left over after all operating and expansion expenses are met. This is the difference between the funds available and the cost of project C. See correct answer for detailed calculations.
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The investments will be financed through 40% debt and 60% common equity. Internally generated funds totaling $1,000,000 are available for reinvestment. If the cost of capital is 11%, and Mason strictly follows the residual dividend policy, how much in dividends would the company likely pay?