The Wagner Company Tries to Follow a Pure "Residual" Dividend

question 15

Multiple Choice

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% and the cost of new equity is 16%. Assuming Wagner has $70 million of investment projects having expected returns greater than 15%, determine the total amount of dividends Wagner should pay.

• A) None
• B) $10 million
• C) $20 million in dividends and raise needed investment funds externally
• D) $80 million in dividends and raise needed investment funds externally

---

Definitions:

Unit Selling Price

The cost for one unit of a product when it is sold.

Unit Variable Costs

Costs that vary directly with the volume of production or sales, such as materials and labor, on a per-unit basis.

Contribution Margin Ratio

A financial metric that measures the portion of revenue remaining after variable production costs that can contribute to covering fixed costs and generating profit.

Unit Contribution Margin

The difference between the selling price per unit and the variable cost per unit, indicating how much each unit sold contributes to fixed costs and profit.