D.Paul Inc.forecasts a capital budget of $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity,and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy,how much income must it earn,and what will be its dividend payout ratio? $\begin{array}{lll}
& \text { Net Income } & \text { Payout } \
W . & \$ 898,750 & 55.63 \% \
\text { X. } & \$ 943,688 & 58.41 \% \
\text { Y. } & \$ 990,872 & 61.34 \% \
\text { Z. } & \$ 1,040,415 & 64.40 \%
\end{array}$

Question

D.Paul Inc.forecasts a capital budget of $725,000.The CFO wants to maintain a target capital structure of 45% debt and 55% equity,and it also wants to pay dividends of $500,000.If the company follows the residual dividend policy,how much income must it earn,and what will be its dividend payout ratio? $\begin{array}{lll} 
& \text { Net Income } & \text { Payout } \
W . & \$ 898,750 & 55.63 \% \
\text { X. } & \$ 943,688 & 58.41 \% \
\text { Y. } & \$ 990,872 & 61.34 \% \
\text { Z. } & \$ 1,040,415 & 64.40 \%
\end{array}$

Quizplus · Accepted Answer

Under a residual dividend policy, the company funds its capital budget using its preferred financing mix and pays dividends with what's left. The capital budget is $725,000, with 45% to be financed by debt, meaning 55% is to be financed by equity. The equity portion is 55% of $725,000 = $398,750. Since the company wants to maintain a dividend payout of $500,000, the total income needed is the sum of the equity portion of the capital budget and the dividends: $398,750 (equity financing) + $500,000 (dividends) = $898,750. The dividend payout ratio is the dividends divided by net income, so $500,000 / $898,750 = 55.63%.

DPaul IncForecasts a Capital Budget of $725,000 A)Choice W B)Choice X C)Choice Y D)Choice Z

DPaul IncForecasts a Capital Budget of $725,000 A)Choice W
B)Choice X
C)Choice Y
D)Choice Z