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Unformatted text preview: e: Residual dividend policy Target Dividends = Net Income - equity ratio Total × capital budget Capital budget – $800,000
Target capital structure – 40% debt, 60% equity
Forecasted net income – $600,000
How much of the forecasted net income should be paid out as dividends? Residual dividend model:
Residual dividend model:
Calculating dividends paid Calculate portion of capital budget to be funded by equity. Calculate excess or need for equity capital. Of the $800,000 capital budget, 0.6($800,000) = $480,000 will be funded with equity.
With net income of $600,000, there is more than enough equity to fund the capital budget. There will be $600,000 $480,000 = $120,000 left over to pay as dividends. Calculate dividend payout ratio $120,000 / $600,000 = 0.20 = 20% Residual dividend policy:
Residual dividend policy:
What if net income drops to $400,000? Rises to $800,000? If NI = $400,000 … Dividends = $400,000 – (0.6)($800,000) = $80,000. Since the dividend results in a negative number, the firm must use all of its net income to fund i...
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- Winter '14