Mom's Apple Pies (MAP) earned $500,000 this year. The company follows the residual dividend policy when paying dividends. MAP has determined that it needs a total of $600,000 for investment in capital budgeting projects this year. If the company's debt/asset ratio is 40 percent, what will its dividend payout ratio be this year? MAP has no preferred stock.

Question

Quizplus · Accepted Answer

Under a residual dividend policy, a company pays dividends from the leftover or residual equity after all project capital needs are met. MAP needs $600,000 for capital budgeting projects but only has $500,000 in earnings. Since the company's debt/asset ratio is 40%, it implies that for every dollar of assets, the company uses 40 cents of debt financing. However, this ratio does not directly affect the calculation for the dividend payout ratio under the residual policy because the focus is on available earnings after capital needs. Since MAP's earnings are less than its capital needs, it would not pay out dividends if strictly following a residual policy. However, the question seems to imply that dividends might still be paid, possibly suggesting a misunderstanding or a hypothetical scenario where the company decides to fund projects partially with debt or has other sources of funding. Given the information, the correct calculation cannot be directly applied without assuming additional details not provided in the question. Therefore, based on the strict interpretation of a residual dividend policy and the given figures, MAP would not pay out dividends, making the calculation of a dividend payout ratio not applicable based on the provided data.

Mom's Apple Pies (MAP) Earned $500,000 This Year