Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio? $$\begin{array} { l r }
\text { Capital budget } & \$ 12,000 \
\% \text { Debt } & 40 \% \
\text { Net income (NI) } & \$ 13,600
\end{array}$$
?
A) 51.29%
B) 37.18%
C) 48.47%
D) 47.06%
E) 45.18%

Question

Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio? $$\begin{array} { l r } 
\text { Capital budget } & \$ 12,000 \
\% \text { Debt } & 40 \% \
\text { Net income (NI) } & \$ 13,600
\end{array}$$
?
A) 51.29%
B) 37.18%
C) 48.47%
D) 47.06%
E) 45.18%

Quizplus · Accepted Answer

The residual dividend model suggests that dividends are paid from the net income after all acceptable investment opportunities have been funded. First, calculate the equity portion of the capital budget: 60% of $12,000 (since 40% is debt, the remainder, 60%, is equity) = $7,200. Then, subtract this from the net income to find the residual income: $13,600 - $7,200 = $6,400. Finally, to find the dividend payout ratio, divide the residual income by the net income: $6,400 / $13,600 = 47.06%.

Portland Plastics Inc Capital budget $12,000% Debt 40% Net income (NI) $13,600\begin{array} { l r } \text { Capital budget } & \$ 12,000 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 13,600\end{array} Capital budget % Debt Net income (NI) ​$12,00040%$13,600​

Portland Plastics Inc $\begin{array} { l r } \text { Capital budget } & \$ 12,000 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 13,600\end{array}$