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The Wagner Company tries to follow a pure residual dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings
The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% while the cost of new equity is 16%. Assuming Wagner has $90 million of investment projects having expected returns greater than 16%, determine Wagner's dividend and investment policies.
A. | Pay out $10 million in dividends and raise $20 million externally |
B. | Pay out $20 million in dividends and raise $30 million externally |
C. | Pay no dividends and raise $10 million externally |
D. | Pay no dividends and invest only in the first $80 million in projects. |
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