Portland Plastics Inc. has the following data. If it follows the residual dividend policy, what is its forecasted dividend payout ratio?
A) 25.36%
B) 28.17%
C) 31.30%
D) 34.78%
E) 38.26%

Question

Quizplus · Accepted Answer

To calculate the forecasted dividend payout ratio, we need to find the earnings retention ratio. 
Earnings retention ratio = 1 - (Dividends/Net Income)
= 1 - (120,000/400,000)
= 1 - 0.3
= 0.7
Using the residual dividend policy, the dividend payout ratio would be the earnings retention ratio multiplied by 1 minus the target payout ratio (60%). 
Dividend payout ratio = 0.7 x (1 - 0.6)
= 0.28 or 28%
Therefore, the answer is D) 34.78%.