Ring Technology has a capital budget of $875,000, it wants to maintain a target capital structure of 35% debt and 65% equity, and it also wants to pay a dividend of $575,000. If the company follows the residual dividend model, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance? $1,395,375 $1,075,125 $1,212,375 $1,143,750 $869,250

The correct answer is $1,143,750.

Explanation:

According to the scenario, the given data are as follows:

Capital budget = $875,000

Debt = 35%

Equity = 65%

Dividend = $575,000

So, we can calculate the required earning by using following formula:

Required earning = Dividend + ( Capital budget × Equity )

= $575,000 + ($875,000 × 65%)

= $575,000 + $568,750

= $1,143,750

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