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

Question

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

Quizplus · Accepted Answer

The residual dividend model implies dividends are paid from leftover equity after funding the capital budget. Equity needed = Capital budget * (1 - % Debt) = $12,500 * 0.60 = $7,500. Residual income for dividends = Net income - Equity needed = $11,500 - $7,500 = $4,000. Dividend payout ratio = Residual income / Net income = $4,000 / $11,500 = 34.78%.

Portland Plastics Inc Capital budget $12,500% Debt 40% Net income (NI) $11,500\begin{array} { l c } \text { Capital budget } & \$ 12,500 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 11,500\end{array} Capital budget % Debt Net income (NI) ​$12,50040%$11,500​

Portland Plastics Inc $\begin{array} { l c } \text { Capital budget } & \$ 12,500 \\\% \text { Debt } & 40 \% \\\text { Net income (NI) } & \$ 11,500\end{array}$