Payout ratio is 11:20
Solution:
Given, Debt = 70%
Equity = 30%
Capital Budget = $3,000,000;
Net Income = $2,000,000;
To find: the payout ratio
Equity retained = Project value [tex]\times[/tex] Percentage of equity in capital structure
Equity retained = [tex]0.3\times\$3,000,000= \$900,000[/tex]
Net Income=$2,000,000
Equity retained=900,000
Earnings Remaining=$1,100,000
Substitute $1,000,000 for project value and 55% for percentage of equity in capital structure
Payout = 55%
To make one percent a fraction, the percentage sign will fall and the sum will be over 100
[tex]55\% = \frac{55}{100}[/tex]
Reduce to get the simplest form
5 is the largest common factor, so divide the numerator and denominator by 5 . Hence its 11:20
The dividend payout ratio is the total amount of dividends paid to shareholders in relation to a company's net income. Thus, the dividend pay-out ratio in this case is 54.16%.
The dividend payout ratio reflects the amount of money that a company after tax (EAT) paid to shareholders. It is calculated by dividing the dividends after tax by earnings after tax and multiplying the result by 100.
As per the given information, Dividend pay-out ratio:
First lets, calculate the amount of dividend paid:
[tex]\rm\,Dividend \,Paid = Net\,Income\,-\,(Weight \,of \,Equity \times \,Capital \,Budget)\\\ \\\rm\,Dividend \,Paid = \$\,1,200,000 - (0.55 \times \$1,000,000)\\\\\\rm\,Dividend \,Paid = \$1,200,000 - \$550,000\\\\\rm\,Dividend \,Paid = \$ 650,000[/tex]
Dividend Pay-out Ratio:
[tex]\\\\\rm\,Dividend\,Pay-Out\,Ratio = \dfrac{\rm\,Dividends\,Paid}{\rm\,Net\,Income}\times100\\\\\,Dividend\,Pay-Out\,Ratio = \dfrac{\rm\,\$650,000}{\rm\,\$1,200,000}\times100\\\\\rm\,Dividend\,Pay-Out\,Ratio = 54.16\%[/tex]
Hence, the dividend pay-out ratio is equal to 54.16%
To learn more about the dividend pay-out ratio, refer to the link:
https://brainly.com/question/26026571
