Problem:
Farm co pays out cash dividends equal to the residual amount that remains after funding 80 percent of its planned capital expenditures. The firm tries to maintain a 20 percent debt and 80 percent equity of its planned capital expenditures and does not plan to issue more stock. The firm estimates to earn 12 million in the next year.
Required:
Question 1: If the firm maintains its target financing mix, what is the most it could spend on capital expenditures next year?
Question 2: If the firm's capital budget next year is 10 million, how much will the firm pay in dividends?
Question 3: What is the dividend payout parentage?
Note: Provide support for your rationale.