Question

Blease Inc. has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?

Answer 1

Forecasted Dividend Pay-out Ratio = 47.37%

Step-by-step explanation:

Capital Budget = $625,000

Net Income = $475,000

Equity Ratio = 40%

Dividend to be paid = Net Income – Equity Ratio*Capital budget

Dividend to be paid =475000 – 40%*675000 = $225,000

therefore, we have that the fortecast dividend pay-out ratio will be given by:

Forecasted Dividend Pay-out Ratio = Dividend to be paid/Net Income

Forecasted Dividend Pay-out Ratio = 225000/475000

Forecasted Dividend Pay-out Ratio = 47.368% or 47.37%