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%

Question

Business

Jaquan Parsons

29 October, 16:11

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%

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Answers (1)

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Graham Duke · Answer 1

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