Axel Telecommunications has a target capital structure that consists of 60% debt

Question

Axel Telecommunications has a target capital structure that consists of 60% debt and 40% equity. The company anticipates that its capital budget for the upcoming year will be $5,000,000. If Axel reports net income of $2,200,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.

%

Axel Telecommunications has a target capital structure that consists of 60% debt and 40% equity. The company anticipates that its capital budget for the upcoming year will be $5,000,000. If Axel reports net income of $2,200,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.

%

Explanation / Answer

Capital budget for the upcoming year will be $5,000,000 that consists of 60% debt and 40% equity.

Debt = $5,000,000*60% = $3,000,000

Equity = $5,000,000*40% = $2,000,000

Axel reports net income of $2,200,000

Residual income = $2,200,000 - $2,000,000 = $200,000

Dividend payout ratio is calculated by dividing dividend paid by net income.

Dividend payout ratio = $200,000/ $2,200,000 = 0.09 or 9%

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