Chandler Communications' CFO has provided the following information: • The company's capital budget is expected to be $5,000,000.
• The company's target capital structure is 70 percent debt and 30 percent equity.
• The company's net income is $4,500,000.
If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year?
A) 33.33%
B) 40.00%
C) 50.00%
D) 60.00%
E) 66.67%

Question

Quizplus · Accepted Answer

Under a residual distribution policy, dividends are paid out from the net income remaining after funding the equity portion of the capital budget. The equity portion is 30% of $5,000,000, which is $1,500,000. The remaining net income for dividends is $4,500,000 - $1,500,000 = $3,000,000. Therefore, the payout ratio is $3,000,000 / $4,500,000 = 66.67%.

Chandler Communications' CFO Has Provided the Following Information: • the Company's