Question
In: Finance
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?
Solutions
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 1 year agoRelated Solutions
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