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 $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be? Net Income Payout Select one: a. $ 898,750 55.63% b. $ 943,688 58.41% c. $ 990,872 61.34% d. $1,040,415 64.40% e. $1,092,436 67.62%

Answer 1

Answer:

a. $ 898,750 55.63%

Explanation:

The computation of the expected dividend payout ratio is shown below:

Expected dividend pay out ratio = 100 - {(capital budget × equity ratio) ÷ (net income}  × 100

= 100 - {($725,000 × 55%) ÷ ($898,750} × 100

= 100 - ($398,750 ÷ $898,750) × 100

= 100 - 44.37%

= 55.63%

The net income is

= $725,000 × 55% + $500,000

= $398,750 + $500,000

= $898,750