Grandin Inc.is evaluating its dividend policy.It has a capital budget of $625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity.The company forecasts a net income of $475,000.If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
A) 40.61%
B) 42.75%
C) 45.00%
D) 47.37%
E) 49.74%

Question

Quizplus · Accepted Answer

Under a residual dividend policy, a company pays dividends from the leftover equity after all project capital needs are met. Grandin Inc. needs 40% equity to finance its $625,000 capital budget, which is $250,000 (40% of $625,000). With a net income of $475,000, after retaining $250,000 for capital budgeting, $225,000 is available for dividends. The dividend payout ratio is then $225,000 / $475,000 = 47.37%.