Question

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 $350,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Select the correct answer.

Answer 1

46.74%

Step-by-step explanation:

The computation of the dividend payout ratio is shown below:

The DIvidend payout ratio is

= Dividend ÷ net income required

where,

Dividend is $350,000

And, the net income is

= $725,000 × 55% + $350,000

= $748,750

So the dividend payout ratio is

= $350,000 ÷ $748,750

= 46.74%

We simply applied the above formula so that the dividend payout ratio could come