Final answer:
In applying the residual distribution model, J Soccer Company will use the remaining net income after capital budget needs to pay dividends, resulting in a payout ratio of 10%.
Step-by-step explanation:
The student is asking about the calculation of the ultimate payout ratio using the residual distribution model in a financial management context. According to this model, the company will pay dividends from the net income left after funding all projects that have a positive net present value (NPV) when financed with equity. The company's capital budget is $1.9 million, and the target capital structure is 55% debt and 45% equity. To find the equity portion of the capital budget, we multiply the total budget by 45%, which gives us $855,000 (0.45 × $1.9 million). Since the net income is $950,000, which is higher than the equity portion needed for the capital budget, the company can pay out the remaining net income as dividends. This means the residual net income that can be paid out as dividends is $950,000 - $855,000 = $95,000. To find out the payout ratio, we divide the dividends ($95,000) by the net income ($950,000), which gives us a ratio of 10%.
The final answer is that J Soccer Company will have a payout ratio of 10%. This is calculated by using the residual distribution model, taking the net income minus the equity needs of the capital budget to determine the dividend payout. Therefore, with a surplus net income after capital budget equity needs, the payout ratio is the dividends divided by the net income.