Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio?
Capital budget $12,500
% Debt 40%
Net income (NI) $11,500
A) 25.36%
B) 28.17%
C) 31.30%
D) 34.78%
E) 38.26%

Question

Quizplus · Accepted Answer

Under the residual dividend model, dividends are paid out from the residual or leftover equity after all project capital needs are met. First, calculate the equity portion of the capital budget: $12,500 * (1 - 0.40) = $7,500. Then, calculate the residual income available for dividends: $11,500 - $7,500 = $4,000. Finally, the dividend payout ratio is $4,000 / $11,500 = 34.78%.