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?

Question

Libby Stark

Business

14 June, 12:41

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?

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Answers (1)

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Timmy · Answer 1

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).