Question

Puckett Products is planning for $1.7 million in capital expenditures next year. Puckett's target capital structure consists of 65% debt and 35% equity. If net income next year is $1.4 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places.

Answer 1

Traget Capital Expenditure = $ 1.7 Million

Target Capital Structure consists of Debet and equiity with 65% and 35% respecitively

Therefore the Capital Expenditure to be financed by equity = Target Equity % x Total Capital Expenditire

Capital Expenditure to be financed by equity = 35%* $1.7 Million = $ 0.595 Million

Now given the Net income = $ 1.4 Million

We need to now dedcut from the net income the Capital Expenditiure portion which is financed by Equity to calculate the proceeds available for distribution of dividend

Therefore Distribution = Net Income - (Capital Expenditure Financed by Equity)

Distribution = $ 1.4 Million - $ 0.595 Million = $ 0.805 Million

Dividend Payout Ratio = Distribution / Net Income

Dividend Payout Ratio = $ 0.805 Million / $1.4 Million

Answer :- Dividend Payout Ratio = 57.5%