Question

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $6,100; % debt 35%; net income (NI) $6,800.

A) 11.76%
B) 13.24%
C) 15.29%
D) 17.43%

Answer 1

To find Chicago Brewing's dividend payout ratio following the residual dividend model, we calculate the equity needed from the capital budget and subtract it from net income. This determines dividends available, which when divided by net income, would give us a payout ratio; however, the correct ratio does not match the available options.

Step-by-step explanation:

The question asks about the dividend payout ratio for Chicago Brewing if it follows the residual dividend model using a given capital budget and percentage of debt. To determine this ratio, we must first calculate the equity portion of the capital budget (since 35% will be financed by debt), and then subtract this equity portion from the net income (NI) to find the residual income that can be paid out as dividends.

Calculating the equity needed for the new capital budget would involve taking 100% - 35% (debt percentage) of $6,100k, which is 65% of $6,100k = $3,965k. Subtracting this amount from the net income ($6,800k - $3,965k) gives us $2,835k available for dividends. The dividend payout ratio is then calculated by dividing the dividends by net income, which gives us $2,835k / $6,800k = 0.417279 or 41.73%. Since none of the provided options match this result, there might be a typo or misunderstanding in the question, or alternative information may need to be considered.