Suppose that ABC Corp. subscribes to a strict residual dividend policy. Their target debt/equity ratio is 0.5. Suppose they are willing to issue up to $3 million in new equity (by issuing stock). Their net income for the period is $4 million.

a) What is the maximum capital expenditure that ABC Corp. can afford, while adhering to their target capital structure and dividend policy?

b) What would be the amount of the dividend if they spent the maximum budget calculated in part a) above?