Residual dividend policy???As president of?Young's of? California, a large clothing? chain, you have justreceived a letter from a major stockholder. The stockholder asksabout the? company's dividend policy. In? fact, the stockholder hasasked you to estimate the amount of the dividend that you arelikely to pay next year. You have not yet collected all theinformation about the expected dividend? payment, but you do knowthe? following: ?
(1) The company follows a residual dividend policy. ?
(2) The total capital budget for next year is likely to be oneof three? amounts, depending on the results of capital budgetingstudies that are currently under way. The capital expenditureamounts are ?$2.2 ?million, ?$3.2 ?million, and ?$4.2 million.?
(3) The forecasted level of potential retained earnings nextyear is ?$2.2 million. ?
(4) The target or optimal capital structure is a debt ratio of45?%. You have decided to respond by sending the stockholder thebest information available to you.
a.??Compute the amount of the dividend? (or the amount of newcommon stock? needed) and the dividend payout ratio for each of thethree capital expenditure amounts.
b.???Compare, contrast, and discuss the amount of dividends?(calculated in part a?) associated with each of the three capitalexpenditure amounts.
