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

Answer:

Dividend payout ratio=0.5417

Explanation:

Dividend paid=Net income-(Weight of equity*Capital budget)

=1,200,000-(0.55*1,000,000)

which is equal to

=$650,000

Hence dividend payout ratio=dividend/net income

=$650,000/1,200,000

which is equal to

=54.17%(Approx).(or 0.5417 approx).