Sweetums Inc, a confectioner best known for its chocolate ogre balls,

Sweetums Inc, a confectioner best known for its chocolate ogre balls, uses the residual dividend model to set its dividends. Selected financial information for Sweetums Inc is provided in the table below.

Sweetums Inc has many new project opportunities and so has decided to cancel its dividend this year. What is the most that it can invest in new projects using only internal equity and maintaining its target capital structure weight for equity?

Selected Financial Information
Sweetums Inc
Net income $90 million
Equity capital structure weight 0.60
Dividends $0

A) $54 million
B) $90 million
C) $100 million
D) $110 million
E) $150 million

ANSWER

E