Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be?

A) 3.95%
B) 5.00%
C) 5.90%
D) 5.35%
E) 5.55%

Question

Chicago Brewing has the following data,dollars in thousands.If it follows the residual dividend model,what will its dividend payout ratio be? ​

A) 3.95% 
B) 5.00% 
C) 5.90% 
D) 5.35% 
E) 5.55%

Quizplus · Accepted Answer

To calculate the dividend payout ratio using the residual dividend model, we need to first find the residual earnings.

Residual Earnings = Net Income - (Target Capital Structure x Total Assets)
= 8000 - (0.6 x 75000)
= 8000 - 45000
= -37000

Since the residual earnings are negative, Chicago Brewing will not be able to pay any dividend using the residual dividend model. Therefore, the dividend payout ratio will be 0%.

However, if we assume that Chicago Brewing still wants to pay a dividend, we can use the formula:

Dividend = Residual Earnings x Dividend Payout Ratio
Dividend Payout Ratio = Dividend / Residual Earnings

Let's assume Chicago Brewing wants to pay a dividend of $1000.

Dividend Payout Ratio = 1000 / -37000
= -0.027
= -2.7%

Since a negative dividend payout ratio does not make sense, we can assume that Chicago Brewing will not pay any dividend.

Therefore, the best choice is B (5.00%) as it is the closest option to 0%.

Chicago Brewing Has the Following Data,dollars in Thousands