Purcell Farms Inc. has the following data, and it follows the residual dividend

Question

Purcell Farms Inc. has the following data, and it follows the residual dividend model. Currently, it finances with 15% debt. Some Purcell family members would like for the dividend payout ratio to be increased. If Purcell increased its debt ratio, which the firm's treasurer thinks is feasible, by how much could the dividend payout ratio be increased, holding other things constant?

Capital budget $3,000,000; Net income (NI) $3,500,000; % Debt now 15%; % Debt after change 60%

a. 44.7%

b. 38.6%

c. 46.9%

d. 40.5%

e. 42.5%

Explanation / Answer

b. 38.6%

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