CFA Level 1: Residual Dividend Policy Calculation

Residual Dividend Policy Calculation

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Question

Chandler Communications' CFO has provided the following information:

* The company's capital budget is expected to be $5,000,000.

* The company's target capital structure is 70 percent debt and 30 percent equity.

* The company's net income is $4,500,000. If the company follows a residual dividend policy, what portion of its net income should it pay out as dividends this year?

Answers

Explanations

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A

$5,000,000 x 0.3 = $1,500,000 of retained earnings needed to fund the capital budget. $4,500,000 - $1,500,000 = $3,000,000 of net income available for dividends. Dividend payout ratio = $3,000,000/$4,500,000 = 0.6667, or 66.67%.

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