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Mr. Gregory White
Mr. Gregory White, Master's Degree
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Experience:  M.A., M.S. Education / Educational Administration
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(TCO C) D. Paul Inc. forecasts a capital budget of $725,000.

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(TCO C) 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
(a) $898,750 55.63%
(b) $943,688 58.41%
(c) $990,872 61.43%
(d) $1,040,415 64.40%
(e) $1,092,436 67.62%
I am stuck

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The answer is

(a) $898,750 55.63%

Capital budget $725,000

Equity ratio 55%

Dividends paid $500,000

NI=Divs + (Eq % × Cap Bud) $898,750

Payout = Dividends/NI 55.63%

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