Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? $$\begin{array} { l r }
\text { Capital budget } & \$ 5,000 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 5,300
\end{array}$$
A) 48.11%
B) 50.52%
C) 55.57%
D) 61.13%
E) 67.24%

Question

Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? $$\begin{array} { l r } 
\text { Capital budget } & \$ 5,000 \
\% \text { Debt } & 45 \% \
\text { Net income (NI) } & \$ 5,300
\end{array}$$
A) 48.11%
B) 50.52%
C) 55.57%
D) 61.13%
E) 67.24%

Quizplus · Accepted Answer

The residual dividend model states that dividends are paid out of the residual earnings after capital expenditures and debt obligations have been met. In this case, the capital budget is $5,000, the debt is 45%, and the net income is $5,300. The residual earnings are $5,300 - $5,000 = $300. The debt obligation is 45% of $5,300 = $2,385. Therefore, the residual dividend is $300 - $2,385 = -$2,085. The dividend payout ratio is -$2,085 / $5,300 = -39.34%. However, dividend payout ratios cannot be negative, so the correct answer is 0%.