Question

Altamonte Telecommunications has a target capital structure that consists of 55% debt and 45% equity. The company anticipates that its capital budget for the upcoming year will be $1,000,000. If Altamonte reports net income of $1,100,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.

Answer 1

59.09%

Step-by-step explanation:

Dividend paid:

= Net income - (Weight of equity × Capital budget)

= 1,100,000 - (0.45 × 1,000,000)

= $650,000

Hence,

Dividend payout ratio = Dividend ÷ net income

= $650,000 ÷ 1,100,000

= 59.09%(Approx).(or 0.5909 approx).

Therefore, the dividend payout ratio is 59.09%.