Residual dividend policy for Wildcat, Inc.

Wildcat, Inc., predicts that earnings in the coming year will be $30 million. There are 8 million shares, and Wildcat maintains a debt-equity ratio of 1.5.

(a) Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

(b) Suppose the firm uses a residual dividend policy. Planned capital expenditures total $40 million. Based on this information, what will the dividend per share be?

(c) In part (b), how much borrowing will take place? What is the addition to retained earnings?

(d) Suppose Wildcat plans no capital outlays for the coming year. What will the dividend be under a residual policy? What will new borrowing be?

© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/residual-dividend-policy-for-wildcat-inc-3ik

Solution Preview

...on to retained earnings? (d) Suppose Wildcat plans no capital outlays for the coming year. What will the dividend be under a residual policy? What will new borrowing be?

a) Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

Equity (maximum retained earnings)= $ 30 million

Debt= 1.5 x $ 30 million= $ 45 million

Maximum investment funds without issuing new shares= $ 30 million+$ 45 million= $ 75 million

(b) Suppose the ...