Good Luck! AG is a semiconductor company operating in Munich, Germany. The capital budget of the company is 20 billion. The CFO of the company believes that the company should maintain a target capital structure with 40% debt and 60% equity. The forecasted net income of the company is 10 billion.

a) How much of the 10 billion should the company pay out as dividends? (5 marks)

b) Mr. Mller, who is a senior board member in the company claims that the net income of 10 billion is a bit optimistic and suggests that the company should consider net incomes of 7,3 billion instead. Mrs. Schneider, however, believes that the company should consider a higher net income of 11 billion for the next year. By applying residual dividend model, calculate the payout ratio under each scenario? Critically discuss what are the impact of these changes on the payout ratio and how it might affect the customers. Do you believe the firm should consider the residual dividend policy? Critically discuss your answer.