Residual distribution. Company planning for 4 million in capital expenditures ne

Question

Residual distribution. Company planning for 4 million in capital expenditures next year. Target capital consist of 70% debt and 39% equity. If net income next year is 2.3 million and If following residual policy as dividends what will be dividend payout ratio? Residual distribution. Company planning for 4 million in capital expenditures next year. Target capital consist of 70% debt and 39% equity. If net income next year is 2.3 million and If following residual policy as dividends what will be dividend payout ratio?

Explanation / Answer

Total Capital Expenditure = 4 million

Target Equity = 39% of 4 million = 4*0.3 = 1.56 million

Target Debt = 70% of 4 million = 4*0.70 = 2.80 million

Net Income = 2.3 millions

Assuming 10% interest on debt,

Interest Payments = 2.80 million * 10% =0.28 million

Following residual policy :

Income left for equity shareholders = 2.3 million - 0.28 million =2.02 million

Futher assuming the face value of one share as 100, Total number of shares = 1.56/100 = 0.0156 million

Therfore Equity dividends = 2.02 million / 0.0156 million = 129.48

Thus, Dividend payout ratio = 2.02 million / 2.30 million = 0.87 or 87%

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