Question

The XYZ Company is maintaining its target capital structure with 40 percent debt and 60 percent equity. Retained earnings this year is expected to be Tshs 10M. The capital budgeting staff has determined that all positive NPV projects for the coming planning period sum to Tshs 8M. The NPVs of projects beyond Tshs 8M in total spending equal zero. If the firm follows a strict residual dividend policy, determine what the dividends will be for the year?

Answer #1

Under Residual Dividend Policy , companies fund capital expenditures with available earnings before paying dividends to shareholders. The first priority for a company using residual dividend policy is to use earnings for capital expenditures, and dividends are paid with the remaining earnings.

Retained Earnings |
10,000,000 |
Tshs |

Capital expenditures |
8,000,000 |
Tshs |

Residual dividend |
2,000,000 |
Tshs |

Dividend for the year =2,000,000 Tshs

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%

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