Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?

Question

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?  ​

Quizplus · Accepted Answer

To calculate the dividend payout ratio using the residual dividend model, we first need to calculate the company's earnings per share (EPS) based on the given data. 
EPS = (Net income - Preferred dividends) / Number of common shares outstanding 
= (4700 - 300) / 1400 
= $3.14 
Next, we need to calculate the target payout ratio using the formula: 
Target payout ratio = (DPS / EPS) - (1 - Retention ratio) 
Where DPS is the desired dividend per share, and retention ratio is the percentage of earnings retained by the company for future growth. 
Assuming that the company wants to retain 30% of its earnings, the target payout ratio would be: 
Target payout ratio = (DPS / EPS) - (1 - 0.3) 
= (DPS / EPS) - 0.7 
If we assume that the company has 1400 common shares outstanding, we can use the given data to solve for the DPS: 
Retained earnings = 1700 
Total dividends paid = 950 
Dividends to be paid = Retained earnings - Total dividends paid 
= 1700 - 950 
= 750 
DPS = Dividends to be paid / Number of common shares outstanding 
= 750 / 1400 
= $0.54 
Now we can substitute DPS and EPS into the formula for the target payout ratio: 
Target payout ratio = (0.54 / 3.14) - 0.7 
= 0.1726 
Finally, we can calculate the actual payout ratio using the formula: 
Payout ratio = 1 - Retention ratio - (1 - Target payout ratio) 
= 1 - 0.3 - (1 - 0.1726) 
= 0.4274 
= 42.74% 
Therefore, the dividend payout ratio for Chicago Brewing using the residual dividend model would be approximately 42.74%, which is closest to option B (56.50%).

Chicago Brewing Has the Following Data,dollars in Thousands