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Acme Inc. is reviewing its capital budget for the upcoming year. It has paid a $3 dividend per share (DPS) for the past several years
Acme Inc. 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 companys target capital structure is 60% equity and 40% debt. They have 1 million shares of common stock outstanding and their net income is $8 million. The company forecasts it would require $10 million to fund all positive NPV projects for the upcoming year.
- If Acme follows the passive residual dividend policy and makes all distributions as dividends, how much retained earnings will it need to fund its capital budget?
- If they follow the passive residual policy, what will be the DPS and payout ratio for the coming year?
- If they maintain their current $3 DPS for next year, how much retained earnings will be available for their capital budget?
- Can the company maintain its current capital structure, maintain the $3 DPS, and maintain a $10 million capital budget without having to raise new common stock? Why?
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