The Wei Corporation expects next year’s net income to be $15 million. The firm’s debt ratio...

The Wei Corporation expects next year’s net income to be $15 million. The firm’s debt ratio is currently 40%. Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei’s dividend payout ratio be next year? (10 points)

Expert Solution

Debt Ratio = 40% therefore Equity is 60%

Distributions = Net Income - (Target Equity Ratio * Total Capital Budget)

Distributions = $15,000,000 - (0.60 * $12,000,000)

Distributions = $7,800,000

Dividend payout ratio = Distributions / Net Income

Dividend payout ratio = $7,800,000 / $15,000,000

Dividend payout ratio = 0.52 or 52%

jeff jeffy answered 3 years ago

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