P12- 3 Residual dividend policy As president of Young's of California, a major clothing chain, he just received a letter from a majority shareholder. The shareholder asks about the company's dividend policy. In fact, the shareholder asked him to calculate the amount of the dividend that he is likely to pay next year. He has not yet gathered all the information on the expected payment of the dividend, but he does know the following: 1. The company follows a residual dividend policy. 2. The total capital budget for next year will likely be one of three amounts, depending on the results of the capital budgeting studies that are being conducted at this time. The capital expenditures amounts are $ 2, 3, and 4 million. 3. The predicted level of potential retained earnings for the next year is $ 1 million. 4. The target or optimal capital structure is a debt ratio of 40%. You decided to respond by sending the best information available to the shareholder. to. Describe a residual dividend policy. b. Calculate the dividend amount (or the required amount of new common shares) and the dividend payment ratio for each of the three capital expenditure amounts. c. Compare and analyze the amount of dividends (calculated in part b) relating to each of the three amounts of capital expenditures.
P12- 3
Residual dividend policy As president of Young's of California, a major clothing chain, he just received a letter from a majority shareholder. The shareholder asks about the company's dividend policy. In fact, the shareholder asked him to calculate the amount of the dividend that he is likely to pay next year. He has not yet gathered all the information on the expected payment of the dividend, but he does know the following:
1. The company follows a residual dividend policy.
2. The total capital budget for next year will likely be one of three amounts, depending on the results of the capital budgeting studies that are being conducted at this time. The capital expenditures amounts are $ 2, 3, and 4 million.
3. The predicted level of potential
4. The target or optimal capital structure is a debt ratio of 40%.
You decided to respond by sending the best information available to the shareholder.
to. Describe a residual dividend policy.
b. Calculate the dividend amount (or the required amount of new common shares) and the dividend payment ratio for each of the three capital expenditure amounts.
c. Compare and analyze the amount of dividends (calculated in part b) relating to each of the three amounts of capital expenditures.
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