FINANCE QUESTION : Small town Diners has a policy of treating dividends as a passive residual. It
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Question:
FINANCE
QUESTION :
Small town Diners has a policy of treating dividends as a passive residual. It forecasts that net
earnings after taxes in the coming year will be $500,000. The firm has earned the same $500,000
for each of the last five years and has paid between $200,000 and $350,000 out in dividends in
each of those years. The company is financed entirely with equity and its cost of equity capital is
12 percent.
1. How much of the coming year's earnings should be paid out in dividends if the company has
$400,000 in projects whose expected returns exceed 12 percent?
2. How much should be paid out if the company has investment projects of $5,000,000 whose
expected return is greater than 12 percent?
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