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The capital budget forecast for the Santano Company is $825,000. The CFO wants to maintain a...

The capital budget forecast for the Santano Company is $825,000. The CFO wants to maintain a target capital structure of 40% debt and 60% 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?

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Expert Solution

Solution :-

Net Income that the company must earn             = $995,000

Dividend payout ratio                                         = 50.25%

The workings are given below:

Equity contribution required for the capital expenditure of $825,000 = 0.60 * 825,000 = $495,000

Add: Dividend to be paid                                                                                     = $500,000

Net Income to be earned for the above two payments                                            = $995,000

Dividend pay out ratio = 500,000 / 995,000 = 50.25%

If there is any doubt please ask in comments

jeff jeffy answered 2 years ago
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