Lunch Special, Inc., predicts that earnings in the coming year will be $43 million. There are eight

Question:

Lunch Special, Inc., predicts that earnings in the coming year will be $43 million. There are eight million shares, and Lunch Special maintains a debt-equity ratio of .9.

a. Calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it.

b. Suppose the firm uses a residual dividend policy. Planned capital expenditures total $50 million. Based on this information, what will the dividend per share be?

c. In part (b), how much borrowing will take place? What is the addition to retained earnings?

d. Suppose the company plans no capital outlays for the coming year. What will the dividend be under a residual policy? What will new borrowing be?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...