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

question 32

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% 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 $20 million in dividends and raise $30 million externally
• B) Pay no dividends and invest only in the first $80 million in projects.
• C) Pay out $10 million in dividends and raise $20 million externally
• D) Pay no dividends and raise $10 million externally

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Definitions:

Stereotaxic Lesioning

Stereotaxic lesioning is a neurosurgical method used to intentionally damage or destroy specific areas of the brain in experiments or treatment.

Cerebrospinal Fluid

The clear, colorless body fluid found in the brain and spinal cord that provides cushioning and nutrients.

Amniotic Fluid

The protective liquid contained within the amniotic sac that surrounds and cushions the fetus during pregnancy.

Somatic Fluid

Bodily fluids that are part of, or produced by, the cells or tissues of the body, excluding reproductive fluids.