The capital budget forecast for the Santano Company is $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 $125,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?
Select the correct answer.
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NI = Dividends + (Equity % * Capital budget)
NI = 125,000 + (0.55 * 725,000)
NI = $523,750
Payout = Dividends/NI
Payout = 125,000 / 523,750
Payout = 0.2387 or 23.87%
d. NI = $523,750 Payout = 23.87% |
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