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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

Sundaram Textiles Ltd has net profit of Rs 80 lakh. It needs Rs 60 lakh for a new project and follows a residual dividend policy, financing 70% of the project from retained earnings and the rest by borrowing. How much dividend can it pay?

The company can pay Rs 38 lakh. Under a residual policy, 70% of the Rs 60 lakh project, or Rs 42 lakh, must come from retained earnings, and only the remaining profit of Rs 80 lakh minus Rs 42 lakh is distributed as dividend.

  1. ARs 38 lakhCorrect
  2. BRs 20 lakh
  3. CRs 42 lakh
  4. DRs 80 lakh

Explanation

Equity portion of the project = 70% x 60 = Rs 42 lakh. Dividend = 80 - 42 = Rs 38 lakh. Rs 42 lakh is a mistake of reporting the retained amount instead of the dividend; Rs 20 lakh comes from 80 - 60.

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