Arden Manufacturing follows a strict residual distribution policy (with all distributions in the form of dividends). The company is forecasting that its net income will be $500 million this year. The company anticipates that its capital budget will be $250 million. The company has a target capital structure that consists of 50 percent equity and 50 percent long-term debt. What is the company's anticipated dividend payout ratio?
A) 75%
B) 55%
C) 50%
D) 25%
E) 47%

Question

Quizplus · Accepted Answer

The company needs $125 million in equity to maintain its 50% equity target for the $250 million capital budget. With $500 million in net income, the residual available for dividends is $375 million. The dividend payout ratio is $375 million / $500 million = 75%.

Arden Manufacturing Follows a Strict Residual Distribution Policy (With All