IAI Actuarial Core Principles · Business Finance · Capital structure and dividend policy
Vistara Components Ltd expects profit after tax of ₹80 crore. It has projects costing ₹90 crore with returns above its cost of capital, and it wants to finance them with 40% debt and 60% equity, keeping its target capital structure. Under a pure residual dividend policy, what dividend will it pay?
The dividend is ₹26 crore. Under a residual policy, the firm first funds the equity share of its investment, 60% of ₹90 crore, which is ₹54 crore, from profits. The remaining ₹80 crore minus ₹54 crore is distributed to shareholders.
- A₹26 croreCorrect
- B₹54 crore
- C₹0
- D₹80 crore
- ₹36 crore
Explanation
Equity needed = 60% × ₹90 crore = ₹54 crore. Dividend = ₹80 crore − ₹54 crore = ₹26 crore. Check: 54 + 26 = 80. The figure of ₹54 crore is the retained equity portion, not the dividend, and ₹36 crore is the debt portion of the financing.
Did you get it right without looking?
One question tells you little. A timed set on Capital structure and dividend policy shows your real accuracy, how long you take and where you lose marks.
More Capital structure and dividend policy questions
- Which statement best describes a scrip (stock) dividend offered by a company to its shareholders?
- Rohan Textiles has an unlevered cost of equity of 15%, and the corporate tax rate is 30%. It holds permanent debt at a market D/E of 0.4 wit…
- Which argument is the central claim of the 'bird in the hand' theory of dividends associated with Gordon and Lintner?
- Tarang Ltd has paid a steady dividend for years. It announces a sharp, unexpected increase in the dividend and its share price rises by 6%. …
- Which statement about the weights used in a company's WACC is most appropriate under standard business finance theory?
- A listed Indian company with surplus cash decides to repurchase some of its own shares in the market rather than pay a cash dividend. Which …