Question

If the company follows a strict residual dividend policy and makes distributions in the form of dividends, what is its expected dividend payout ratio for this year?

Answer 1

Answer: 89%

Explanation:

Calculate the dividend pay-out ratio.

Company has a capital structure of 30% which means that 30% of the capital budget of $88 million has to come from retained earnings;

= 30% * 88

= $26.4 million will come from retained earnings

The amount left for dividends will therefore be;

= 240 - 26.4

= $213.6 million

Dividend Payout ratio;

= Dividend / Net income

= 213.6/240

= 89%