Portland Plastics Inc.has the following data.If it follows the residual dividend model,what is its forecasted dividend payout ratio?

Question

Quizplus · Accepted Answer

To calculate the dividend payout ratio using the residual dividend model, we need to first calculate the amount of earnings retained by the company. Using the information provided in the table, the earnings per share (EPS) is $4.00, and the required return on equity (k) is 13%. Using the formula for the present value of growth opportunities (PVGO), we can calculate the amount of earnings retained by the company:

PVGO = (EPS × (1 - payout ratio)) / (k - g)
$6.50 = ($4.00 x (1 - payout ratio)) / (0.13 - 0.08)
1.30 = (4.00 x (1 - payout ratio)) / 0.05
0.065 = (1 - payout ratio)
payout ratio = 1 - 0.065 = 0.935 = 93.5%
dividend payout ratio = 1 - 93.5% = 6.5% = 0.065

Therefore, the forecasted dividend payout ratio using the residual dividend model is 6.5%, or 34.78% (rounded to two decimal places). The best choice is D.