Answer:
a. Amount funded with equity is $4,800,000
b. Dividend is $3,200,000
c. Dividend Payout ratio is 40.00%
Explanation:
Note: This question is incomplete, and the complete one is as follows:
As a financial manager for WillPower, Inc, you have the following information: a) The company follows a residual dividend policy; b) The total capital budget for next year is likely to be $8,000,000; c) The forecasted level of earnings next year is $8,000,000; d) The target or optimal capital structure is a debt ratio of 40%;
Please answer the following questions:
a. What will be the amount funded with equity for the project ? (Keep the answer to a whole number. Example of answer format: $1,000,000)
b. Compute the amount of the dividend . (Keep the answer to a whole number. Example of answer format: $1,000,000)
c. Compute the dividend pay-out ratio . (Keep the answer to two decimals. Example of the answer format: 55.55%)
The following are therefore the explanation of the answers to the question:
a. What will be the amount funded with equity for the project ? (Keep the answer to a whole number. Example of answer format: $1,000,000)
Given that the target or optimal capital structure is a debt ratio of 40%, this implies that there will be 40% debt finance and 60% (100% - 40%) equity finance. Therefore, we have:
Amount funded with equity = Total capital budget for next year * Percentage of equity finance = 8,000,000 * 60% = $4,800,000
b. Compute the amount of the dividend. (Keep the answer to a whole number. Example of answer format: $1,000,000)
Since the company follows a residual dividend policy, it implies that the earnings available are employed to finance capital expenditure budget first before dividends are paid to the shareholders.
Since amount funded with equity is $4,800,000 as obtained in part a, it implies that this must be deducted first from the forecasted level of earnings next year to obtain the residual that will be paid as dividend as follows:
Dividend = Forecasted level of earnings next year - Amount funded with equity = $8,000,000 - $4,800,000 = $3,200,000
c. Compute the dividend pay-out ratio . (Keep the answer to two decimals. Example of the answer format: 55.55%)
Dividend payout ratio refers to the percentage of the earnings or net income of a company that is paid by the company to its shareholders as dividend. This can therefore be calculated
Dividend Payout ratio = Dividend / Earnings = $3,200,000 / $8,000,000 = 0.40, or 40.00%
Therefore, WillPower, Inc is expected to pay 40% of its earnings as dividend to its shareholders.
