Question

Yellow Duck Distribution Company has generated earnings of $240,000,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $83,000,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure. The company makes distributions in the form of dividends. What will Yellow Duck Distribution Company’s dividend payout ratio be if it follows a residual dividend policy? 67.36% 59.44% 63.40% 79.25%

Answer 1

79.25%

Step-by-step explanation:

Data provided in the question:

Net income = $240,000,000

Equity = 60%

Debt = 40%

Capital budget = $83,000,000

Now,

Dividend amount = Net income - (Capital budget × Equity )

= $240,000,000 - ( $83,000,000 × 0.60 )

= $240,000,000 - $49,800,000

= $190,200,000

Thus,

Dividend payout ratio = (Dividend amount ) ÷ ( Net income)

= $190,200,000 ÷ $240,000,000

= 0.7925

or

= 0.7925 × 100% = 79.25%

Hence,

The correct answer is option 79.25%