Wolfpack Multimedia follows a strict residual distribution policy (with all distributions in the form of dividends). Wolfpack forecasts that its net income will be $12 million this year. The company has no depreciation expense so its net cash flow is $12 million, and its target capital structure consists of 70 percent equity and 30 percent debt. Wolfpack's capital budget is $10 million. What is the company's dividend payout ratio?
A) 16.67%
B) 41.67%
C) 11.67%
D) 0.00%
E) 58.30%

Question

Quizplus · Accepted Answer

First, we need to calculate the total capital of Wolfpack Multimedia. 
Total Capital = Capital Budget / Equity ratio
Total Capital = $10M / 0.7 = $14.29M

Next, we need to calculate the amount of equity and debt in the capital structure. 
Equity = Total Capital x Equity ratio = $14.29M x 0.7 = $10M 
Debt = Total Capital x Debt ratio = $14.29M x 0.3 = $4.29M

Now, we can calculate the dividend payout ratio. 
Dividend Payout Ratio = Dividend / Net Income 
Dividend = Net Income - Capital Budget 
Dividend = $12M - $10M = $2M

Dividend Payout Ratio = $2M / $12M = 16.67%

Therefore, the answer is B) 16.67%.

Wolfpack Multimedia Follows a Strict Residual Distribution Policy (With All