Question

QUESTION 40 The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be

Answer 1

$898,750 and 55.63%

Step-by-step explanation:

The computation is shown below:

For income earned, the calculation is

= Foretasted capital budget × equity capital structure + dividend paid

= $725,000 × 0.55 + $500,000

= $398,750 + $500,000

= $898,750

And, the dividend payout ratio is

= Dividend ÷ Total earnings

= $500,000 ÷ $898,750

= 55.63%

Hence, the income earned is $898,750 and the dividend payout ratio is 55.63%