Expected Dividend Payout Ratio

E

Equity requirement = 0.6($1,200,000) = $720,000.

Expected NI$800,000 -

Equity requirement720,000 -

Available for dividends$80,000 -

Payout ratio = $80,000/$800,000 = 0.10 = 10%.

To determine the expected dividend payout ratio using the residual dividend model, we need to calculate the amount of retained earnings and the dividend payout. The residual dividend model suggests that a company should first meet its capital budgeting requirements and then distribute the remaining earnings as dividends.

Given information: Net income = $800,000 Capital budget = $1,200,000 Capital structure:

• Debt = 40%
• Common equity = 60%

First, we need to calculate the amount of equity available for dividends. Since the capital structure is 60% common equity, we can determine the equity portion of the capital budget:

Equity portion of capital budget = Capital budget * Common equity ratio = $1,200,000 * 60% = $720,000

Next, we calculate the retained earnings:

Retained earnings = Net income - Equity portion of capital budget = $800,000 - $720,000 = $80,000

The dividend payout ratio is calculated by dividing the dividends by the net income:

Dividend payout ratio = Dividends / Net income

Since the residual dividend model suggests distributing the remaining earnings as dividends, the dividend amount will be equal to the retained earnings:

Dividend payout ratio = Retained earnings / Net income = $80,000 / $800,000 = 0.1

Therefore, the expected dividend payout ratio is 10%. Answer choice E, 10%, is the correct answer.