Advantages of following a residual dividend policy

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Question: Cracus Company has a capital budget of $10 million. It wants to maintain a capital structure of 55 percent debt and 45 percent equity. This year it expects net income of $7 million. The company has 40 million authorized shares, and 20 million are outstanding. Last year the company paid a dividend of $0.30 per share.

a. How much equity is required?

b. How much will the company pay in dividends if it follows a residual dividend policy?

c. How much external equity will the company require if it pays the same dividend as last year?

d. What are 3 advantages of following a residual dividend policy?

e. What are 3 disadvantages of following a residual dividend policy?

Reference no: EM131793890

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