Residual Dividend Policy
The Re a data Corporation practices a strict residual dividend policy and maintains a capital structure of 60 percent debt, 40 percent equity. Earnings for the year are $5,000. What is the maximum amount of capital spending possible without selling new equity? Suppose that planned investment outlays for the coming year are $12,000. Will Re a data be paying a dividend? If so, how much?
|
Market Value Balance Sheet before paying out excess cash) |
|||
|
Excess cash |
$ 500 |
Debt |
$ 500 |
|
Other assets |
2,500 |
Equity |
2,500 |
|
Total |
$3,000 |
Total |
$3,000 |
Evaluate the two alternatives in terms of the effect on the price per share of the stock, the EPS, and the PE ratio.