Spraggins Inc has a new capital budget for next year of 1218

Spraggins Inc. has a new capital budget for next year of 1,218,000 and has a target debt fraction of 0.65. If the firm following the residual dividend policy and wants to retain its target capital structure, what must its retained earning be next year?

Solution

retained earnings must equal the equity fraction used to fund the fudget

retained earnings = (1 - 0.65) * 1,218,000 = 426,300