CFA Practice Question

There are 131 practice questions for this study session.

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?

A. $67,240
B. $192,857
C. $862,500
Correct Answer: B

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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