Question

Hey, I have an accounting problem here in front of me and I'm not really sure how to approach it. So here it is:

If XYZ Corp uses a residual dividend model to calculate dividends and their capital budget is $800,000, Target Equity Ratio= 60%, Forecasted Net Income= $600,000 A) how much should be paid out as dividends? B) compute dividend payout ratio C) if net income rises to $800,000, how much should be paid as dividends?

Again not really sure how to approach, I feel as if there is missing information here.

Answer 1

According to Residual dividend model

Dividend = net income - [(targeted equity ratio) - (total capital budget)]

Where,

Net income = $600000

Equity ratio = 60%

Capital budget = $800000

A)

$600000 - [60% × 800000)

= $600000 - $480000

= $120000

B) dividend payout ratio = dividend paid/net income

= $120000/600000

= 20%

C) if income rises to $800000

Then dividend paid = $800000 - (60% × $800000)

= $800000 - $480000

= $320000

Dividend payout ratio = $320000/400000

= 40%

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