Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividen
ID: 2772525 • Letter: M
Question
Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of $3,900 for the year and needs $3,500 for new investments. What is the total amount Merlo will pay out in dividends this year?
$1,400
$286
$0
$1,000
$2,386
Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of $3,900 for the year and needs $3,500 for new investments. What is the total amount Merlo will pay out in dividends this year?
Explanation / Answer
Merlo's earnings = $3900
New investment = $3500
Of which 60 % will be invested from earnings = $2100 & 40 % debt financing = $1400.
$1400 is not needed as it will be arranged through debt financing hence it is the residual earning for dividend payout this year.