Question

ABC Co follows a residual dividend policy and maintains a constant debt-equity ratio. There are 15,000 shares of stock outstanding at a market price of $12 a share. There are 300 bonds outstanding, which are selling at $1,200. The projected spending on capital projects is $210,000 for next year. Earnings for next year are estimated at $100,000. What is the projected dividend amount per share?

a

$6.67

b

$2.00

c

$2.50

d

$222

Answer 1

Market value of equity = 15,000 * 12 = $180,000

Market value of debt = 300 * 1,200 = $360,000

Debt-equity ratio = 360,000:180,000 = 2:1

Projected spending = $210,000

Debt = 210,000 * 2/3 = $140,000

Equity = 210,000 * 1/3 = $70,000

Dividends = Estimated earnings - Equity

Dividends = 100,000 - 70,000

Dividends = $30,000

Dividends per share = Dividends/Number of shares outstanding

Dividends per share = 30,000/15,000

Dividends per share = $2.00

Option b is correct