Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividen

Question

Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of $3,900 for the year and needs $3,500 for new investments. What is the total amount Merlo will pay out in dividends this year?

$1,400

$286

$0

$1,000

$2,386

Merlo, Inc. maintains a debt-equity ratio of 0.40 and follows a residual dividend policy. The company has after-tax earnings of $3,900 for the year and needs $3,500 for new investments. What is the total amount Merlo will pay out in dividends this year?

Explanation / Answer

Merlo's earnings = $3900

New investment = $3500

Of which 60 % will be invested from earnings = $2100 & 40 % debt financing = $1400.

$1400 is not needed as it will be arranged through debt financing hence it is the residual earning for dividend payout this year.

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