Powell Products anticipates that its capital budget next year will be $3 million. The company expects to report net income of $5 million this year. The company's target capital structure is 65 percent common equity and 35 percent long-term debt. Assume the company follows a strict residual distribution policy (with all distributions in the form of dividends). What is the expected dividend payout ratio this year?

Question

Quizplus · Accepted Answer

The expected dividend payout ratio this year is 61%. This is calculated as follows:Dividend payout ratio = Dividends / Net incomeDividends = Net income - (Capital budget * Target debt ratio)Dividends = $5 million - ($3 million * 0.35)Dividends = $3.25 millionDividend payout ratio = $3.25 million / $5 millionDividend payout ratio = 65%

Powell Products Anticipates That Its Capital Budget Next Year Will