FarmCo Inc follows a policy of paying out cash dividends equal to the residual amount that remains after

Question

FarmCo, Inc. follows a policy of paying out cash dividends equal to the residual amount that remains after

funding 30 percent of its planned capital expenditures. The firm tries to maintain a 30 percent debt and 70 percent equity capital structure and does not plan on issuing more stock in the coming year.​ FarmCo’s CFO has estimated that the firm will earn $ 17 million in the current year.

a. If the firm maintains its target financing mix and does not issue any equity next​ year, what is the most it could spend on capital expenditures next year given its earnings​ estimate?

b. If​ FarmCo’s capital budget for next year is $ 14 ​million, how much will the firm pay in dividends and what is the resuing dividend payout​ percentage?

Finance