American Generation Ecology (AGE) expects to grow at a constant rate of 4 percent forever. Its target debt/asset ratio is 60 percent and it expects to have profitable investments of $300,000 this year. AGE plans to continue paying the same dividend that has been paid the past 20 years, $1.50 per share, long into the future. The firm has 400,000 shares of stock outstanding. If net income is expected to be $800,000, what should be AGE's dividend payout ratio this year?

Question

Quizplus · Accepted Answer

The dividend payout ratio is calculated as the total dividends paid divided by the net income. AGE is paying $1.50 per share in dividends and has 400,000 shares outstanding, so the total dividends paid are $1.50 * 400,000 = $600,000. With a net income of $800,000, the dividend payout ratio is $600,000 / $800,000 = 0.75, or 75%.

American Generation Ecology (AGE) Expects to Grow at a Constant