CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy
Himalaya Foods Ltd plans a project with an initial outlay of ₹500 lakh. Its target capital structure is 60% equity and 40% debt. The firm has earnings of ₹200 lakh and follows a residual dividend policy. How much dividend can it pay?
Under a residual dividend policy, the firm first funds the equity portion of its investment from earnings. The project needs 60% of ₹500 lakh, or ₹300 lakh, of equity, which exceeds earnings of ₹200 lakh, so the dividend is nil.
- A₹0Correct
- B₹100 lakh
- C₹200 lakh
- D₹300 lakh
Explanation
Equity needed = 60% of 500 = ₹300 lakh. Earnings are only ₹200 lakh, so all earnings are retained and there is no residual left for dividends. Paying ₹100 lakh would require raising extra external equity.
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