FarmCo, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains

Question:

FarmCo, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains after funding 60 percent of its planned capital expenditures. The firm tries to maintain a 40 percent debt and 60 percent equity and does not plan on issuing more stock in the coming year. FarmCo’s CFO has estimated that the firm will earn $ 12 million in the current year.
a. If the firm maintains its target financing mix and does not issue any equity next year, what is the most it could spend on capital expenditures next year given its earnings estimate?
b. If FarmCo’s capital budget for next year is $ 10 million, how much will the firm pay in dividends and what is the resulting payout percentage? Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
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