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11 April, 07:20

Paul Inc. forecasts a capital budget of $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?

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  1. 11 April, 11:06
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    If the company follows the residual dividend policy, the income he must earn is $898,750

    The dividend payout ratio will be 55.63%

    Explanation:

    In order to calculate the income must it earn we would have to make the following calculation:

    income must it earn=55% equity+dividends

    55% equity=$725,000*0.55

    55% equity=$398,750

    Therefore, income must it earn=$398,750+$500,000

    income must it earn=$898,750

    If the company follows the residual dividend policy, the income he must earn is $898,750.

    To calculate the dividend payout ratio we would have to calculate the following formula:

    dividend payout ratio=dividends paid/income must it earn

    dividend payout ratio=$500,000 / $898,750

    dividend payout ratio=55.63%

    The dividend payout ratio will be 55.63%
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