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Basic Question 4 of 13
Lucky Mike's, Inc. has a target debt/equity ratio of 0.75. After-tax earnings for 2011 were $850,000 and the firm needs $1,150,000 for new investments. If the company follows a residual dividend policy, what dividend will be paid?
B. $192,857
C. $862,500
A. $67,240
B. $192,857
C. $862,500
User Contributed Comments 10
| User | Comment |
|---|---|
| kalps | Can comeone explain how this is calculated please ???? |
| blumonster | 3/7 X $1150000 - amt to be financed by debt 4/7 X $1150000=$657,142.68 - amt to be financed by equity this is to maintain the debt/equity ratio of 0.75 Dividend paid= 850,000-657,142.68= $192,857 |
| eavotri | From the question .75Equity = Liability A=L+E A=.75E+E A=1.75E if assets is 1 then E=1/1.75 which is .571 Thus 850000-[.571*1150000] |
| synner | ratio .75:1, so 1/1.75 is equity's share |
| katybo | A/P = D/P + P/P = A/P = 3/4 + 4/4 = 7/4 A/P=7/4 -> P= $1.150.000 * 4/7 = 657.142 D = 1.150.000 - 657.142 |
| sarath | Good question.. |
| americade | The way i did the calc: 1.75 (1=equity plus .75 of equity=debt) divided into the amount required ($1,150,000) equals the amount of the investment that needs to be financed by equity = $657,142.69, the rest of the net income of the $850k can be paid out. |
| aroman21 | great question.... |
| Meto | debt/equity (D/E) is 0.75 E/D+E = 1/1.75 Equity portion in the new investment=1150000*1/1.75=657143 the residual dividens = 850000-657143=192857 |
| b25331 | fantastic question..... |
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Learning Outcome Statements
compare stable dividend with constant dividend payout ratio, and calculate the dividend under each policy;
describe broad trends in corporate payout policies;
CFA® 2025 Level II Curriculum, Volume 3, Module 16.