LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?
Capital budget
$5,000
% Debt
45%
Net income (NI)
$7,000
A) 60.71%
B) 63.75%
C) 70.13%
D) 77.14%
E) 84.85%

Question

Quizplus · Accepted Answer

Under the residual dividend model, dividends are paid out from the residual or leftover equity after all capital expenditures are funded. The equity portion of the capital budget is 55% (100% - 45% debt), which is $2,750 (55% of $5,000). The residual income available for dividends is $7,000 - $2,750 = $4,250. The dividend payout ratio is $4,250 / $7,000 = 60.71%.

LA Moving Company Has the Following Data, Dollars in Thousands