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.

1. 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? 2. If they follow the passive residual policy, what will be the DPS and payout ratio for the coming year? 3. If they maintain their current $3 DPS for next year, how much retained earnings will be available for their capital budget? 4. 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