The capital budget forecast for the Santano Company is $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 its dividend payout ratio be?
Net Income Payout

Question

Quizplus · Accepted Answer

The correct answer is A because the residual dividend policy states that the dividend is paid out of the residual income after all other financial obligations have been met. In this case, the company has a capital budget forecast of $725,000 and wants to maintain a target capital structure of 45% debt and 55% equity. This means that the company will need to raise $326,250 (45% of $725,000) in debt and $398,750 (55% of $725,000) in equity. The company also wants to pay dividends of $500,000. Therefore, the company must earn $898,750 ($326,250 + $398,750 + $500,000) in order to meet its financial obligations. The dividend payout ratio will be 55.63% ($500,000 / $898,750).

The Capital Budget Forecast for the Santano Company Is $725,000