Question

Consider the case of Yellow Duck Distribution Company: Yellow Duck Distribution Company is expected to generate $180,000,000 in net income over the next year. Yellow Duck Distribution has forecasted a capital budget of $83,000,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity. If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year?

A. 81.86%
B. 64.63%
C. 86.17%
D. 73.24%

Answer 1

C. 86.17%

Step-by-step explanation:

The computation of the expected dividend payout ratio is shown below:

Expected dividend pay out ratio = 100 - {(capital budget × equity ratio) ÷ (net income} × 100

= 100 - {($83,000,000 × 30%) ÷ ($180,000,000} × 100

= 100 - (24,900,000 ÷ $180,000,000) × 100

= 100 - 13.83%

= 86.17%

All other information which is given is not relevant. Hence, ignored it