The Wagner Company Tries to Follow a Pure "Residual" Dividend

Multiple Choice

The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million, respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15% and the cost of new equity is 16%. Assuming Wagner has $70 million of investment projects having expected returns greater than 15%, determine the total amount of dividends Wagner should pay.

A) None
B) $10 million
C) $20 million in dividends and raise needed investment funds externally
D) $80 million in dividends and raise needed investment funds externally