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 its dividend payout ratio be? Net Income
Payout
W. $898,750
55)63%
X.$943,688
58)41%
Y.$990,872 61)34%
Z.$1,040,415
64)40%

Question

Quizplus · Accepted Answer

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

D Paul Inc