question archive GREAT maintains a debt-equity ratio of
GREAT maintains a debt-equity ratio of
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GREAT maintains a debt-equity ratio of .50 and follows a residual dividend policy. The firm needs $270,000 for new investments next year. The after tax earnings this year are $170,000. How will this project be financed? What is the amount that the Clothing Depot will pay out in dividends for this year?
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answer:- 0 or zero
explanation
Equity needed for new investment = [1.00/(1+.50) ]× $2,70000 = $1,80000
The equity needed exceeds the earnings of $1,70000.
Thus, there are no residual earnings and therefore no dividends will be paid.
