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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

RESIDUAL DIVIDEND MODEL Altamonte Telecommunications has a target capital structure that consists of 45% debt and 55% equity. The company anticipates that its capital budget for the upcoming year will be $1,000,000. If Altamonte reports net income of $1,200,000 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.

Introduction:

Residual Dividend Model:

Under the residual dividend policy first preference is given to the current capital investment by the company. The amount that remains 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 $1,000,000

Percentage of equity in capital structure is 55%

Formula to calculate equity retained is.

EquityRetained=Projectvalue×%ofequityincapitalstructure

Substitute $1,000,000 for Project value and 55% for percentage of equity in capital structure,

Equityretained=$1,000,000×55%=$550,000

So equity retained for the project is $550,000.

Calculation of total dividend paid to get the dividend payout ratio

Given,

Net income $1,200,000

Equity retained for the project $550,000.

Formula to calculate total amount of dividend paid is

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