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CS Executive · Corporate Accounting and Financial Management · Dividend Decisions

Kaveri Ltd follows a residual dividend policy. Its profit after tax is Rs 90 lakh. It has an investment proposal needing Rs 100 lakh, to be financed in a 60:40 equity to debt ratio, and it uses retained earnings as the equity source. What amount will be available for dividend?

Rs 30 lakh is available for dividend. Under the residual policy, the equity portion of the investment, 60% of Rs 100 lakh or Rs 60 lakh, is funded from retained earnings first. The remainder of the Rs 90 lakh profit is then paid out as dividend.

  1. ARs 30 lakhCorrect
  2. BRs 50 lakh
  3. CRs 10 lakh
  4. DRs 40 lakh

Explanation

Equity needed = 60% of Rs 100 lakh = Rs 60 lakh, met from retained earnings. Dividend = 90 - 60 = Rs 30 lakh. Rs 50 lakh wrongly subtracts only the 40% debt share from profit's... it is not derived from the data, and Rs 10 lakh wrongly subtracts the full Rs 100 lakh.

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