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

question 16

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 percent while the cost of new equity is 16 percent.If Wagner has $90 million of investment projects having expected returns greater than 16 percent, 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:

Unrealized Loss

A loss that results from holding onto an asset that has decreased in price, but has not yet been sold.

Trading Investments

Investments in securities for the purpose of selling them in the near term to generate profit from short-term price fluctuations.

Statement of Income

A financial document that reports a company's financial performance over a specific period, detailing revenues, expenses, and net profit or loss.

Long-Term Investments

Assets that a company intends to hold for more than one year, including stocks, bonds, or real estate.