Answer:
Debt = 55% x $10,000,000 = $5,500,000
Equity = 45% x $10,000,000 = $4,500,000
Total capital budget $10,000,000
Residual earnings = Net income - Investment in equity
Residual earnings = $6,000,000 - $4,500,000 =$1,500,000
Dividend payout = Residual earnings x 100
Net income
= $1 ,500,000 x 100
$6,000,000
= 25%
The correct answer is D
Explanation:
In this respect, there is need to determine the investment in equity, which is 45% of the total capital budget. Then, we will calculate the residual earning, which is net income minus investment in equity. Finally, the dividend payout ratio will be computed by dividing the residual earning by the net income multiplied by 100.
