Peterson & Peterson Company plans to undertake a massive capital expansion project next year that will require $10 million investment. The companys target capital structure consists of 60% debt and 40% equity. Peterson has 1million shares of stock outstanding. If net income next year is

$6 million and the company follows a residual distribution policy with all distributions as dividends, determine the following:

1. the companys dividend per share for next year
2. the companys forecasted dividend payout ratio
3. the amount of equity financing and long-term debt needed to finance the project
4. What are the advantages and disadvantages of the companys residual policy? (Hint: do not neglect signaling and clientele effects.)