Question

Refer to the previous problem (the projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600,000). Kandell has a $2.50 dividend per share, and 100,000 outstanding shares of stock. Suppose Kandell's management wants to maintain the $2.50 DPS. In addition, the company wants to maintain its target capital structure and its $1 million capital budget. What is the minimum dollar amount of new common stock the company would have to issue in order to meet all of its objectives?

Group of answer choices

25,000

50,000

75,000

100,000

125,000

Answer 1

Correct Option is 2nd $50000

Explaintion and Working

As Per Residual Dividend Policy Divedend are paid after retaining the fund required for Capital Expenditure

Given by

Distribution (Divindend) = Net income - Retained Earning Needed For Capital Expenditure

As Required in Question Kandell Corporation Wants to maintain its DPS , Capital Structure , and its Capital Bugdet

Dividend =$ 2.50* 100000=$ 250000

Retained Earning Required for Capital Expenditure = $1000000*40% = $ 400000

Net Income = $600000

Hence Income Available for Divended if after Capital Expenditure is maintain = $600000-$400000=$200000

Dollar Amount required to meet Capital Expenditure = $350000-$20000=$50000