Question

petersen company has a capital budget of $1.0 million. the company wants to maintain a target capital structure which is 40% debt and 60% equity. the company forecasts its net income this year will be $400,000. if the company follows the residual distribution model and pays all distributions as dividends, what will be its ultimate payout ratio?

Answer 1

The ultimate payout ratio of Petersen Company would be 40%.

Step-by-step explanation:

The ultimate payout ratio refers to the percentage of a company's net income that is distributed as dividends.

To calculate the ultimate payout ratio in this case, we first need to determine the amount of debt and equity in the company's capital structure. The capital budget is $1.0 million, and the target capital structure is 40% debt and 60% equity. So, the company would have $400,000 in debt and $600,000 in equity.

Next, we need to calculate the total amount of dividends that will be paid based on the net income. Since the company follows the residual distribution model and pays all distributions as dividends, the total amount of dividends would be equal to the net income, which is $400,000.

Finally, we can calculate the ultimate payout ratio by dividing the total dividends by the sum of debt and equity: $400,000 / ($400,000 + $600,000) = 0.4 or 40%.