BuyFindarrow_forward

Fundamentals of Financial Manageme...

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

Solutions

Chapter
Section
BuyFindarrow_forward

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

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

EXPECTATIONS THEORY One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Describe what a tariff is and its economic effects.

Principles of Macroeconomics (MindTap Course List)

Should an economic model describe reality exactly?

Essentials of Economics (MindTap Course List)