Kurt's Adventures has a debt-equity ratio of 3. Earnings for next year are estimated at $30,000. Capital spending is estimated at $100,000 for next year. If the company follows a residual dividend policy, what is the estimated dividend payout ratio?

Question

Quizplus · Accepted Answer

The residual dividend policy states that dividends are paid out of the residual earnings after capital spending. In this case, earnings are $30,000 and capital spending is $100,000. Therefore, the residual earnings are $30,000 - $100,000 = -$70,000. Since the residual earnings are negative, no dividends will be paid out. Therefore, the dividend payout ratio is 0%.

Kurt's Adventures Has a Debt-Equity Ratio of 3