Chapter 14: Dividends True/False Page 511
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. The optimal distribution policy strikes that balance between current
dividends and capital gains that maximizes the firm’s stock price.
a. True
b. False
2. Other things held constant, the higher a firm’s target payout ratio,
the higher its expected growth rate should be.
a. True
b. False
3. Miller and Modigliani’s dividend irrelevance theory says that the
percentage of its earnings a firm pays out in dividends has no effect
on either its cost of capital or its stock price.
a. True
b. False
4. Miller and Modigliani’s dividend irrelevance theory says that the
percentage of its earnings a firm pays out in dividends has no effect
on its cost of capital, but it does affect its stock price.
a. True
b. False
5. If investors prefer firms that retain most of their earnings, then a
firm that wants to maximize its stock price should set a low payout
ratio.
a. True
b. False
CHAPTER 14
DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND
SHARE REPURCHASES
Page 512 True/False Chapter 14: Dividends
6. A 100% stock dividend and a 2:1 stock split should, at least
conceptually, have the same effect on the firm’s stock price.
a. True
b. False
7. A “reverse split” reduces the number of shares outstanding.
a. True
b. False
8. The announcement of an increase in the cash dividend should, according
to MM, lead to an increase in the price of the firm’s stock, other
things held constant.
a. True
b. False
9. The federal government sometimes taxes dividends and capital gains at
different rates. Other things held constant, an increase in the tax
rate on dividends relative to that on capital gains would logically
lead to an increase in dividend payout ratios.
a. True
b. False
10. The federal government sometimes taxes dividends and capital gains at
different rates. Other things held constant, if the tax rate on
dividends is high relative to that on capital gains, then individuals
with low taxable incomes should favor stocks with low payouts and high–
income individuals should favor high-payout companies.
a. True
b. False
11. It has been argued that investors prefer high-payout companies because
dividends are more certain (less risky) than the capital gains that are
supposed to come from retained earnings. However, Miller and
Modigliani say that this argument is incorrect, and they call it the
“bird-in-the-hand fallacy.” MM base their argument on the belief that
most dividends are reinvested in stocks, hence are exposed to the same
risks as reinvested earnings.
a. True
b. False
Chapter 14: Dividends True/False Page 513
12. Underlying the dividend irrelevance theory proposed by Miller and
Modigliani is their argument that the value of the firm is determined
only by its basic earning power and its business risk.
a. True
b. False
13. One implication of the bird-in-the-hand theory of dividends is that a
given reduction in dividend yield must be offset by a more than
proportionate increase in growth in order to keep a firm’s required
return constant, other things held constant.
a. True
b. False
14. If a retired individual lives on his or her investment income, then it
would make sense for this person to prefer stocks with high payouts so
he or she could receive cash without going to the trouble and expense
of selling stocks. On the other hand, it would make sense for an
individual who would just reinvest any dividends received to prefer a
low-payout company because that would save him or her taxes and
brokerage costs.
a. True
b. False
15. Some investors prefer dividends to retained earnings (and the capital
gains retained earnings bring), while others prefer retained earnings
to dividends. Other things held constant, it makes sense for a company
to establish its dividend policy and stick to it, and then it will
attract a clientele of investors who like that policy.
a. True
b. False
16. Suppose a firm that has been earning $2 and paying a dividend of $1.00,
or a 50% dividend payout, announces that it is increasing the dividend
to $1.50. The stock price then jumps from $20 to $30. Some people
would argue that this is proof that investors prefer dividends to
retained earnings. Miller and Modigliani would agree with this
argument.
a. True
b. False
17. If the information content, or signaling, hypothesis is correct, then a
change in a firm’s dividend policy can have an important effect on its
stock price and cost of equity.
Page 514 True/False Chapter 14: Dividends
a. True
b. False
18. If a firm uses the residual dividend model to set dividend policy, then
dividends are determined as a residual after providing for the equity
required to fund the capital budget. Under this model, the better the
firm’s investment opportunities, the lower its payout ratio will be,
other things held constant.
a. True
b. False
19. If a firm uses the residual dividend model to set dividend policy, then
dividends are determined as a residual after providing for the equity
required to fund the capital budget. Under this model, the higher the
firm’s debt ratio, the lower its payout ratio will be, other things
held constant.
a. True
b. False
20. If management wants to maximize its stock price, and if it believes
that the dividend irrelevance theory is correct, then it must adhere to
the residual dividend policy.
a. True
b. False
21. If on January 3, 2011, a company declares a dividend of $1.50 per
share, payable on January 31, 2011, then the price of the stock should
drop by approximate $1.50 on January 31.
a. True
b. False
22. If on January 3, 2011, a company declares a dividend of $1.50 per
share, payable on January 31, 2011, to holders of record on January 19,
then the price of the stock should drop by approximately $1.50 on
January 17, which is the ex-dividend date.
a. True
b. False
23. One advantage of dividend reinvestment plans is that they allow
shareholders to delay paying taxes on the dividends that they choose to
reinvest.
a. True
b. False
Chapter 14: Dividends True/False Page 515
24. There are two types of dividend reinvestment plans. Under one type of
plan, the firm uses the cash that would have been paid as dividends to
buy stock on the open market. Under the other type, the company issues
new stock, keeps the cash that would have been paid out, and in effect
sells new stock to those investors who choose to reinvest their
dividends.
a. True
b. False
25. If a firm pays out all of its earnings as dividends and its
stockholders then elect to have all of their dividends reinvested, the
company should reconsider its dividend policy and possibly move to a
lower dividend payout ratio.
a. True
b. False
26. If a firm declares a 20:1 stock split, and the pre-split price was
$500, then we might expect the post–split price to be $25. However, it
often turns out that the post-split price will be higher than $25.
This higher price could be due to signaling effects–investors believe
that management split the stock because they think the firm is going to
do better in the future. The higher price could also be because
investors like lower-priced shares.
a. True
b. False
27. Your firm uses the residual dividend model to set dividend policy.
Market interest rates suddenly rise, and stock prices decline. Your
firm’s earnings, investment opportunities, and capital structure do not
change. If the firm follows the residual dividend model, then its
dividend payout ratio would increase.
a. True
b. False
28. Suppose you plotted a curve which showed a Firm U’s WACC on the
vertical axis and its debt ratio on the horizontal axis. Then you
plotted a similar curve for Firm V. The curve for firm U resembled a
shallow “U,” while that for Firm V resembled a sharp “V.” Both firms
have debt ratios that cause their WACCs to be minimized. Other things
held constant, it would be easier for Firm V than for Firm U to
maintain a steady dividend in the face of varying investment
opportunities and earnings from year to year.
a. True
b. False
Page 516 True/False Chapter 14: Dividends
Multiple Choice: Conceptual
29. In the real world, dividends
a. are usually more stable than earnings.
b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes, and
these changes are randomly higher to lower, depending on whether
earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of
earnings, so if EPS = $2.00, then DPS would equal $0.80. Once the
percentage is set, then dividend policy is on “automatic pilot” and
the dividend actually paid depends strictly on earnings.
30. You own 100 shares of Troll Brothers’ stock, which currently sells for
$120 a share. The company is about to declare a 2-for-1 stock split.
Which of the following best describes your likely position after the
split?
a. You will have 200 shares of stock, and the stock will trade at or
near $120 a share.
b. You will have 200 shares of stock, and the stock will trade at or
near $60 a share.
c. You will have 100 shares of stock, and the stock will trade at or
near $60 a share.
d. You will have 50 shares of stock, and the stock will trade at or
near $120 a share.
e. You will have 50 shares of stock, and the stock will trade at or
near $600 a share.
31. Myron Gordon and John Lintner believe that the required return on
equity increases as the dividend payout ratio is lowered. Their
argument is based on the assumption that
a. investors are indifferent between dividends and capital gains.
b. investors require that the dividend yield plus the capital gains
yield equal a constant.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential future
capital gains.
e. investors prefer a dollar of expected capital gains to a dollar of
expected dividends because of the lower tax rate on capital gains.
Chapter 14: Dividends Conceptual M/C Page 517
32. Your firm adheres strictly to the residual dividend model. All else
equal, which of the following factors would be most likely to lead to
an increase in the firm’s dividend per share?
a. The firm’s net income increases.
b. The company increases the percentage of equity in its target capital
structure.
c. The number of profitable potential projects increases.
d. Congress lowers the tax rate on capital gains, leaving the rest of
the tax code unchanged.
e. Earnings are unchanged, but the firm issues new shares of common
stock.
33. If a firm adheres strictly to the residual dividend policy, and if its
optimal capital budget requires the use of all earnings for a given
year (along with new debt according to the optimal debt/assets ratio),
then the firm should pay
a. the same dividend as it paid the prior year.
b. no dividends to common stockholders.
c. dividends only out of funds raised by the sale of new common stock.
d. dividends only out of funds raised by borrowing money (i.e., issuing
debt).
e. dividends only out of funds raised by selling off fixed assets.
34. If a firm adheres strictly to the residual dividend model, the issuance
of new common stock would suggest that
a. the dividend payout ratio has remained constant.
b. the dividend payout ratio is increasing.
c. no dividends will be paid during the year.
d. the dividend payout ratio is decreasing.
e. the dollar amount of capital investments had decreased.
35. Which of the following does NOT normally influence a firm’s dividend
policy decision?
a. The firm’s ability to accelerate or delay investment projects
without adverse consequences.
b. A strong preference by most of its shareholders for current cash
income versus potential future capital gains.
c. Constraints imposed by the firm’s bond indenture.
d. The fact that much of the firm’s equipment is leased rather than
bought and owned.
e. The fact that Congress is considering changes in the tax law
regarding the taxation of dividends versus capital gains.
Page 518 Conceptual M/C Chapter 14: Dividends
36. Which of the following would be most likely to lead to a decrease in a
firm’s dividend payout ratio?
a. Its earnings become more stable.
b. Its access to the capital markets increases.
c. Its research and development efforts pay off, and it now has more
high-return investment opportunities.
d. Its accounts receivable decrease due to a change in its credit
policy.
e. Its stock price has increased over the last year by a greater
percentage than the increase in the broad stock market averages.
37. Which of the following statements is CORRECT?
a. When firms are deciding on the size of stock splits–say whether to
declare a 2–for-1 split or a 3-for-1 split, it is best to declare
the smaller one, in this case the 2-for-1 split, because then the
after-split price will be higher than if the 3-for-1 split had been
used.
b. Back before the SEC was created in the 1930s, companies would
declare reverse splits in order to boost their stock prices.
However, this was determined to be a deceptive practice, and
reverse splits are illegal today.
c. Stock splits create more administrative problems for investors than
stock dividends, especially determining the tax basis of their
shares when they decide to sell them, so today stock dividends are
used far more often than stock splits.
d. When a company declares a stock split, the price of the stock
typically declines–for example, by about 50% after a 2-for-1 split–
–and this necessarily reduces the total market value of the firm’s
equity.
e. If a firm’s stock price is quite high relative to most stocks–say
$500 per share–then it can declare a stock split of say 20-for-1 so
as to bring the price down to something close to $25. Moreover, if
the price is relatively low–say $2 per share–then it can declare a
“reverse split” of say 1-for-10 so as to bring the price up to
somewhere around $20 per share.
38. Which of the following statements about dividend policies is CORRECT?
a. Miller and Modigliani argued that investors prefer dividends to
capital gains because dividends are more certain than capital gains.
They call this the “bird-in-the-hand” effect.
b. One reason that companies tend to favor distributing excess cash as
dividends rather than by repurchasing stock is that dividends are
normally taxed at a lower rate than gains on repurchased stock.
c. One advantage of dividend reinvestment plans is that they allow
shareholders to delay paying taxes on the dividends that they choose
to reinvest.
d. One key advantage of the residual dividend model is that it enables
a company to follow a stable dividend policy.
Chapter 14: Dividends Conceptual M/C Page 519
e. The clientele effect suggests that companies should follow a stable
dividend policy.
39. Which of the following statements is CORRECT?
a. One disadvantage of dividend reinvestment plans is that they
increase transactions costs for investors who want to increase their
investment in the company.
b. One advantage of dividend reinvestment plans is that they enable
investors to postpone paying taxes on the dividends credited to
their account.
c. Stock repurchases can be used by a firm that wants to increase its
debt ratio.
d. Stock repurchases make sense if a company expects to have a lot of
profitable new projects to fund over the next few years, provided
investors are aware of these investment opportunities.
e. One advantage of an open market dividend reinvestment plan is that
it provides new equity capital and increases the shares outstanding.
40. Which of the following statements is CORRECT?
a. Under the tax laws as they existed in 2010, a dollar received by an
individual taxpayer as interest income is taxed at the same rate as
a dollar received as dividends.
b. One nice feature of dividend reinvestment plans (DRIPs) is that they
reduce the taxes investors would have to pay if they received cash
dividends.
c. Empirical research indicates that, in general, companies send a
negative signal to the marketplace when they announce an increase in
the dividend. As a result, share prices fall when dividend
increases are announced because investors interpret the increase as
a signal that the firm expects fewer good investment opportunities
in the future.
d. If a company needs to raise new equity capital, a new stock dividend
reinvestment plan would make sense. However, if the firm does not
need new equity, then an open market purchase dividend reinvestment
plan would probably make more sense.
e. Dividend reinvestment plans have not caught on in most industries,
and today over 99% of all DRIPs are offered by utilities.
41. Which of the following statements is CORRECT?
a. Historically, the tax code has encouraged companies to pay dividends
rather than retain earnings.
b. If a company uses the residual dividend model to determine its
dividend payments, dividend payout will tend to increase whenever
its profitable investment opportunities increase relatively rapidly.
c. The more a firm’s management believes in the clientele effect, the
more likely the firm is to adhere strictly to the residual dividend
model.
Page 520 Conceptual M/C Chapter 14: Dividends
d. Large stock repurchases financed by debt tend to increase expected
earnings per share, but they also tend to increase the firm’s
financial risk.
e. A dollar paid out to repurchase stock has the same tax benefit as a
dollar paid out in dividends. Thus, both companies and investors
should be indifferent between distributing cash through dividends
and stock repurchase programs.
42. Which of the following statements is CORRECT?
a. If a company has a 2-for-1 stock split, its stock price should
roughly double.
b. Capital gains earned on shares repurchased are taxed less favorably
than dividends, which is why companies typically pay dividends and
avoid share repurchases.
c. Very often, a company’s stock price will rise when it announces that
it plans to commence a share repurchase program. Such an
announcement could lead to a stock price decline, but this does not
normally happen.
d. Stock repurchases increase the number of outstanding shares.
e. The clientele effect is the best explanation for why companies tend
to vary their dividend payments from quarter to quarter.
43. Which of the following statements is CORRECT?
a. Firms with a lot of good investment opportunities and a relatively
small amount of cash tend to have above-average dividend payout
ratios.
b. One advantage of the residual dividend model is that it leads to a
stable dividend payout, which investors like.
c. An increase in the stock price when a company cuts its dividend is
consistent with signaling theory as postulated by MM.
d. If the “clientele effect” is correct, then for a company whose
earnings fluctuate, a policy of paying a constant percentage of net
income will probably maximize its stock price.
e. Stock repurchases make the most sense at times when a company
believes its stock is undervalued.
44. Which of the following statements is CORRECT?
a. One advantage of dividend reinvestment plans is that they enable
investors to avoid paying taxes on the dividends they receive.
b. If a company has an established clientele of investors who prefer a
high dividend payout, and if management wants to keep stockholders
happy, it should not adhere strictly to the residual dividend model.
c. If a firm adheres strictly to the residual dividend model, then,
holding all else constant, its dividend payout ratio will tend to
rise whenever its investment opportunities improve.
d. If Congress eliminates taxes on capital gains but leaves the
personal tax rate on dividends unchanged, this would motivate
companies to increase their dividend payout ratios.
Chapter 14: Dividends Conceptual M/C Page 521
e. Despite its drawbacks, following the residual dividend model will
tend to stabilize actual cash dividends, and this will make it
easier for firms to attract a clientele that prefers high dividends,
such as retirees.
45. Firm M is a mature company in a mature industry. Its annual net income
and cash flows are consistently high and stable. However, M’s growth
prospects are quite limited, so its capital budget is small relative to
its net income. Firm N is a relatively new company in a new and
growing industry. Its markets and products have not stabilized, so its
annual operating income fluctuates considerably. However, N has
substantial growth opportunities, and its capital budget is expected to
be large relative to its net income for the foreseeable future. Which
of the following statements is CORRECT?
a. Firm M probably has a lower target debt ratio than Firm N.
b. Firm M probably has a higher target dividend payout ratio than Firm
N.
c. If the corporate tax rate increases, the debt ratio of both firms is
likely to decline.
d. The two firms are equally likely to pay high dividends.
e. Firm N is likely to have a clientele of shareholders who want a
consistent, stable dividend income.
46. Which of the following statements is CORRECT?
a. If a firm repurchases some of its stock in the open market, then
shareholders who sell their stock for more than they paid for it
will be subject to capital gains taxes.
b. An open-market dividend reinvestment plan will be most attractive to
companies that need new equity and would otherwise have to issue
additional shares of common stock through investment bankers.
c. Stock repurchases tend to reduce financial leverage.
d. If a company declares a 2-for-1 stock split, its stock price should
roughly double.
e. One advantage of adopting the residual dividend model is that this
makes it easier for corporations to meet the requirements of
Modigliani and Miller’s dividend clientele theory.
47. Which of the following actions will best enable a company to raise
additional equity capital, other things held constant?
a. Refund long–term debt with lower cost short-term debt.
b. Declare a stock split.
c. Begin an open-market purchase dividend reinvestment plan.
d. Initiate a stock repurchase program.
e. Begin a new–stock dividend reinvestment plan.
Page 522 Conceptual M/C Chapter 14: Dividends
48. Which of the following statements is NOT CORRECT?
a. Stock repurchases can be used by a firm as part of a plan to change
its capital structure.
b. After a 3-for-1 stock split, a company’s price per share should
fall, but the number of shares outstanding will rise.
c. Investors may interpret a stock repurchase program as a signal that
the firm’s managers believe the stock is undervalued, or,
alternatively, as a signal that the firm does not have many good
investment opportunities.
d. A company can repurchase stock to distribute a large one-time cash
inflow, say from the sale of a division, to stockholders without
having to increase its regular dividend.
e. Stockholders pay no income tax on dividends if the dividends are
used to purchase stock through a dividend reinvestment plan.
49. Which of the following statements is CORRECT?
a. If a firm follows the residual dividend model, then a sudden
increase in the number of profitable projects would be likely to
lead to a reduction of the firm’s dividend payout ratio.
b. The clientele effect explains why so many firms change their
dividend policies so often.
c. One advantage of adopting the residual dividend model is that this
policy makes it easier for a corporation to attract a specific and
well-identified dividend clientele.
d. New-stock dividend reinvestment plans are similar to stock dividends
because they both increase the number of shares outstanding but
don’t change the firm’s total amount of book equity.
e. Investors who receive stock dividends must pay taxes on the value of
the new shares in the year the stock dividends are received.
50. Which of the following statements is CORRECT?
a. Suppose a firm that has been earning $2 and paying a dividend of
$1.00, or a 50% dividend payout, announces that it is increasing the
dividend to $1.50. The stock price then jumps from $20 to $30.
Some people would argue that this is proof that investors prefer
dividends to retained earnings. Miller and Modigliani would agree
with this argument.
b. Other things held constant, the higher a firm’s target dividend
payout ratio, the higher its expected growth rate should be.
c. Miller and Modigliani’s dividend irrelevance theory says that the
percentage of its earnings that a firm pays out in dividends has no
effect on its cost of capital, but it does affect its stock price.
d. The federal government sometimes taxes dividends and capital gains
at different rates. Other things held constant, an increase in the
tax rate on dividends relative to that on capital gains would
logically lead to a decrease in dividend payout ratios.
e. If investors prefer firms that retain most of their earnings, then a
firm that wants to maximize its stock price should set a high
dividend payout ratio.
Chapter 14: Dividends M/C Problems Page 523
Multiple Choice: Problems
These problems can be changed algorithmically, and the computer can, at times, produce
combinations of variables where the residual policy results in zero dividends and a zero payout
ratio. We sometimes constrain the input variables to prevent this from occurring, but we
sometimes permit it. When this possibility exists, we so indicate.
51. Portland Plastics Inc. has the following data. If it follows the
residual dividend model, what is its forecasted dividend payout ratio?
Capital budget $12,500
% Debt 40%
Net income (NI) $11,500
a. 25.36%
b. 28.17%
c. 31.30%
d. 34.78%
e. 38.26%
52. Becker Financial recently declared a 2-for-1 stock split. Prior to the
split, the stock sold for $80 per share. If the firm’s total market
value is unchanged by the split, what will the stock price be following
the split?
a. $36.10
b. $38.00
c. $40.00
d. $42.00
e. $44.10
53. Toombs Media Corp. recently completed a 3-for-1 stock split. Prior to
the split, its stock sold for $90 per share. The firm’s total market
value was unchanged by the split. Other things held constant, what is
the best estimate of the stock’s post-split price?
a. $30.00
b. $31.50
c. $33.08
d. $34.73
e. $36.47
54. Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to
the split, the stock sold for $80 per share. If the firm’s total
market value is unchanged by the split, what will the stock price be
following the split?
a. $20.63
b. $21.71
c. $22.86
d. $24.00
Page 524 M/C Problems Chapter 14: Dividends
e. $25.20
55. Fauver Industries plans to have a capital budget of $650,000. It wants
to maintain a target capital structure of 40% debt and 60% equity, and
it also wants to pay a dividend of $225,000. If the company follows
the residual dividend model, how much net income must it earn to meet
its investment requirements, pay the dividend, and keep the capital
structure in balance?
a. $584,250
b. $615,000
c. $645,750
d. $678,038
e. $711,939
56. Ring Technology has a capital budget of $850,000, it wants to maintain
a target capital structure of 35% debt and 65% equity, and it also
wants to pay a dividend of $400,000. If the company follows the
residual dividend model, how much net income must it earn to meet its
capital budgeting requirements and pay the dividend, all while keeping
its capital structure in balance?
a. $ 904,875
b. $ 952,500
c. $1,000,125
d. $1,050,131
e. $1,102,638
57. D. Paul Inc. forecasts a capital budget of $725,000. The CFO wants to
maintain a target capital structure of 45% debt and 55% equity, and she
also wants to pay a dividend of $500,000. If the company follows the
residual dividend model, how much income must it earn, and what will
its dividend payout ratio be?
a. $ 898,750; 55.63%
b. $ 943,688; 58.41%
c. $ 990,872; 61.34%
d. $1,040,415; 64.40%
e. $1,092,436; 67.62%
58. Banerjee Inc. wants to maintain a target capital structure with 30%
debt and 70% equity. Its forecasted net income is $550,000, and its
board of directors has decreed that no new stock can be issued during
the coming year. If the firm follows the residual dividend model, what
is the maximum capital budget that is consistent with maintaining the
target capital structure?
a. $673,652
b. $709,107
c. $746,429
d. $785,714
Chapter 14: Dividends M/C Problems Page 525
e. $825,000
59. Dentaltech Inc. projects the following data for the coming year. If
the firm follows the residual dividend model and also maintains its
target capital structure, what will its dividend payout ratio be?
EBIT $2,000,000 Capital budget $850,000
Interest rate 10% % Debt 40%
Debt outstanding $5,000,000 % Equity 60%
Shares outstanding 5,000,000 Tax rate 40%
a. 37.2%
b. 39.1%
c. 41.2%
d. 43.3%
e. 45.5%
60. Mortal Inc. expects to have a capital budget of $500,000 next year.
The company wants to maintain a target capital structure with 30% debt
and 70% equity, and its forecasted net income is $400,000. If the
company follows the residual dividend model, how much in dividends, if
any, will it pay?
a. $45,125
b. $47,500
c. $50,000
d. $52,500
e. $55,125
61. Torrence Inc. has the following data. If it uses the residual dividend
model, how much total dividends, if any, will it pay out?
Capital budget $1,000,000
% Debt 60%
Net income (NI) $625,000
a. $183,264
b. $192,909
c. $203,063
d. $213,750
e. $225,000
62. NY Fashions has the following data. If it follows the residual
dividend model, how much total dividends, if any, will it pay out?
Capital budget $1,500,000
% Debt 65%
Net income (NI) $550,000
a. $20,363
b. $21,434