Question

Altamonte Telecommunications has a target capital structure that consists of 45% debt and 55 % equity. The company anticipates that its capital budget for the upcoming year will be $1,000,000. If Altamonte reports net income of $1,200,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?

Answer 1

Payout ratio is 11:20

Solution:

Given, Debt = 70%

Equity = 30%

Capital Budget = $3,000,000;  

Net Income = $2,000,000;  

To find: the payout ratio

Equity retained = Project value $\times$ Percentage of equity in capital structure

Equity retained = $0.3\times\ 3,000,000= \ 900,000$

Net Income=$2,000,000

Equity retained=900,000

Earnings Remaining=$1,100,000

Substitute $1,000,000 for project value and 55% for percentage of equity in capital structure

Payout = 55%

To make one percent a fraction, the percentage sign will fall and the sum will be over 100  

$55\% = \frac{55}{100}$

Reduce to get the simplest form

5 is the largest common factor, so divide the numerator and denominator by 5 . Hence its 11:20