(14–11)

Residual Distribution Model Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a $3 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 60% equity and 40% debt, it has 1 million shares of common equity outstanding, and its net income is $8 million. The company forecasts it would require $10 million to fund all of its profitable (i.e., positive-NPV) projects for the upcoming year.

a. If Buena Terra follows the residual model and makes all distributions as dividends, how much retained earnings will it need to fund its capital budget?