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Clark Farms Inc
Clark Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15% debt. Some Clark family members would like for the dividends to be increased. If Clark increased its debt ratio, which the firm's treasurer thinks is feasible, by how much could the dividend be increased, holding other things constant?
Capital budget $3,000,000 Net income (NI) $3,500,000 % Debt now 15% % Debt after change 60% a. $1,093,500 b. $1,215,000 c. $1,350,000 d. $1,485,000 e. $1,633,500
Expert Solution
A residual dividend policy is basically one type of dividend policy, which states that a company will prioritize capital expenditures before paying out dividends to shareholders. Anytime a company follows the model of a residual dividend policy, it doesn’t have an excess cash at any given time. All cash is distributed to pay for the operational needs of the business (reinvestment).
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