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13. A firm follows a residual dividend policy and maintains a constant debt-to-equity ratio. There are...

13. A firm follows a residual dividend policy and maintains a constant debt-to-equity ratio. There are 9,250 common shares outstanding at a market price of $12 per share, as well as 366 bonds outstanding and selling at a par value of $1,000. The projected spending on capital projects is $167,110 for next year. Net income for next year is estimated to be $64,950. What is the projected dividend amount per share for next year?

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Answer #1

Market value of Equity = Number of shares outstanding * Market price

= 9250*$12

=$111000

Market value of Bonds = Number of Bonds outstanding*Selling price

= 366*$1000

= $366000

Weight of Equity = Market value of Equity/(Market value of Debt +Market value of Equity)

= $111000/($366000+$111000)

= $111000/$477000

= 0.2327044

Residual dividend = Net income - Equity weight*Capital expenditure

= $64950-0.2327044*$167110

= $64950-$38887.23

= $26062.77

Projected dividend amount per share = Residual dividend/Total number of shares outstanding

= $26062.77/9250

= $2.82

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