Residual Dividend Policy Preti Rock (PR), Inc., predicts that earnings in the coming year will be $56

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Residual Dividend Policy Preti Rock (PR), Inc., predicts that earnings in the coming year will be $56 million. There are 12 million shares, and PR maintains a debt–equity ratio of 2.

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. (See Concept Question 3.) Planned capital expenditures total $72 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 PR plans no capital outlays for the coming year. What will the dividend be under a residual policy? What will new borrowing be? LO.1

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