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Sara, a new management trainee at ABC Bhd was asked by her boss to explain the dividend policy of the company to newly elected Board
Sara, a new management trainee at ABC Bhd was asked by her boss to explain the dividend policy of the company to newly elected Board members of the company. The Board are interested in understanding how would they estimate the dividend amount likely to be paid the following year. Her boss provides the following information: The company follows a residual dividend policy The total capital budget for next year is dependent on the outcome of a feasibility study, and will either be RM2 million or RM3.5 milion The forecasted level of retained earnings for next year is RM1.5 million The company would like to maintain a debt to equity ratio of 40% Required: a. Compute the expected amount of the dividend, if any, for each of the capital budget amount (4 marks) b. Explain why there are differences in the amounts of the dividend for the capital budget amounts (2 marks)
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