Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio

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Business

Savanna Gibson

21 September, 05:38

Grandin Inc. is evaluating its dividend policy. It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of $475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio

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Iris Benson · Answer 1

47.37%

Explanation:

The capital budget is $625,000 out of which 40% is equity and the rest 60% is debt. The company forecasts the net income for the year to be $475,000. Grandin Inc. follows residual dividend policy and pays out all the residual income to its shareholders as dividend.

The portion of equity in the capital budget is $625,000 * 40% = $250,000

The net income potion which will be attributable to equity shareholders is

$250,000 / $475,000 = 47.37%