The Pioneer Corporation has a target capital structure that consists of 55% debt and 45% equity. Pioneer's capital budget next year will be $10,000,000. Given that the company follows a residual dividend policy and its most recent yearly net income is $6,000,000, determine the Pioneer's dividend payout ratio. a. 12%b. 38%c. 47%d. 25%

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Business

Everett Wolf

1 May, 16:46

The Pioneer Corporation has a target capital structure that consists of 55% debt and 45% equity. Pioneer's capital budget next year will be $10,000,000. Given that the company follows a residual dividend policy and its most recent yearly net income is $6,000,000, determine the Pioneer's dividend payout ratio. a. 12%b. 38%c. 47%d. 25%

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Dana Berger · Answer 1

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.