   Chapter 15, Problem 1P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of$2,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?

Summary Introduction

To calculate: The dividend payout ratio after following a residual dividend payout policy.

Residual Dividend Model: Under the residual dividend policy, first preference is given to the current capital investment of the company, where the amount remained after the capital investment is distributed among the shareholders as dividend.

Explanation

Calculation of equity retained to get the dividend payout ratio

Given,

Project value $3,000,000 Percentage of equity in capital structure is 30% Formula to calculate equity retained is. EquityRetained=Projectvalue×%ofequityincapitalstructure Substitute$3,000,000 for Project value and 30% for percentage of equity in capital structure,

Equityretained=$3,000,000×30%=$900,000

So equity retained for project is $900,000. Calculation of total dividend paid to get the dividend payout ratio Given, Net income$2,000,000

Equity retained for the project \$900,000.

Formula to calculate total amount of dividend paid is.

Totaldividendspaid=TotalearningsEquityretained

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