Question 1: As a financial manager for Old's California, you have the following information:
a) The company follows a residual dividend policy;
b) The total capital budget for next year is likely to be $5 million;
c) The forecasted level of potential retained earnings next year is $8million;
d) The target or optimal capital structure is a debt ratio of 50%;
Please answer the following questions:
a) Describe a residual dividend policy.
b) Compute the amount of the dividend (or the amount of new common stock needed).
c) Compute the dividend pay-out ratio.
Question 2: A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?