Question

D. Paul Inc. forecasts a capital budget of $775,000. The CFO wants to maintain a target capital structure of 45% debt and 55% equity, and she also wants to pay a dividend of $650,000. If the company follows the residual dividend model, how much income must it earn, and what will its dividend payout ratio be? Group of answer choices $1,076,250; 60.39% $1,087,013; 59.80% $871,763; 74.56% $861,000; 75.49% $1,097,775; 59.21%

Answer 1

The correct option is the first one,$1,076,250; 60.39%

Step-by-step explanation:

For the company to be able to pay $650,000 in dividends it must have recorded net income equals to $650,000 plus 55% of capital budget(since equity contribution to the project is 55%).

This simply implies that equity contributed 55% of the capital funding but gets in return the amount invested plus the dividend payout.

Net income=$650,000+($775,000*55%)

=$650,000+$426250

=$ 1,076,250.00

Dividend payout ratio=net income/dividends

net income is 1,076,250.00

dividends is 650,000

dividend payout ratio=650,000/ 1,076,250.00 =60.39%