Stargell Industries Follows a Strict Residual Dividend Policy

question 54

Multiple Choice

Stargell Industries follows a strict residual dividend policy.The company has a capital budget of $3,000,000.It has a target capital structure which consists of 30 percent debt and 70 percent equity.The company forecasts that its net income will be $3,500,000.What will be the company's payout ratio this year?

• A) 25%
• B) 30%
• C) 35%
• D) 40%
• E) 45%

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Definitions:

Positive Basis

In futures trading, a situation where the spot or cash price of a commodity is lower than the future price, indicating expectations of higher future prices.

Borrowing Cost

The cost incurred by an entity when it raises funds through debt financing, which may include interest payments and other fees.

Convertible Arbitrage

A trading strategy that involves taking a long position in convertible securities and a short position in the stock of the issuing company to exploit pricing inefficiencies.

Interest-Sensitive Securities

Financial instruments whose value and yield are heavily influenced by fluctuations in interest rates.