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RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists of 35% debt and...

RESIDUAL DIVIDEND MODEL

Axel Telecommunications has a target capital structure that consists of 35% debt and 65% equity. The company anticipates that its capital budget for the upcoming year will be $1,000,000. If Axel reports net income of $900,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places.

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Answer #1

Required capital budget = $1,000,000

Amount of debt from capital budget = $1,000,000 * 35% = $350,000

Amount of equity from capital budget = $1,000,000 * 65% = $650,000

Net Income = $900,000

Residual income after capital budget requirement = Net income - Amount of equity from capital budget

= $900,000 - $650,000

= $250,000

Dividend payout ratio = Residual income available after capital budget requirement / Net income

= $250,000 / $900,000

= 0.2777777

Therefore, payout ratio is 27.78%

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