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**CFA Practice Question**

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

Correct Answer: B

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**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..... |