LA Moving Company has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? $$\begin{array} { l r }
\text { Capital budget } & \$ 6,700 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 7,250
\end{array}$$
?
A) 46.71%
B) 60.97%
C) 36.88%
D) 44.26%
E) 49.17%

Question

LA Moving Company has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? $$\begin{array} { l r } 
\text { Capital budget } & \$ 6,700 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 7,250
\end{array}$$
?
A) 46.71%
B) 60.97%
C) 36.88%
D) 44.26%
E) 49.17%

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 by subtracting the debt portion from the total capital budget. The debt portion is 45% of $6,700, which is $3,015. Thus, the equity portion needed is $6,700 - $3,015 = $3,685. Then, the amount available for dividends is the net income minus the equity portion needed for the capital budget, which is $7,250 - $3,685 = $3,565. The dividend payout ratio is then the dividends (the amount available for dividends) divided by the net income, which is $3,565 / $7,250 = 49.17%.