Stargell Industries follows a strict residual dividend policy. The company has a capital budget of $3,000,000. It has a target capital structure, which consists of 30 percent debt and 70 percent equity. The company forecasts that its net income will be $3,500,000. What will be the company's expected dividend payout ratio this year?
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A. B. C. D. E.A
Step 1 Find equity required to maintain capital budget:
Capital budget$3,000,000 -
% of budget financed with equityx 0.70
$2,100,000
Step 2 Calculate dividend:
Earnings$3,500,000 -
Less equity retained(2,100,000)
Dividend$1,400,000 -
Step 3 Find payout ratio:
Dividend/Earnings = $1,400,000/$3,500,000 = 0.4000 = 40%.