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Petersen Company has a capital budget of $1.0 million. The company wants to maintain a target capital structure that is 55% debt and 45% equity. The company forecasts that its net income this year will be $800,000. If the company follows a residual distribution model and pays all distributions as dividends, what will be its payout ratio?

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Answer: 43.75%

Explanation:

Payout ratio = Dividends paid / Earnings

Company has a Capital budget of $1 million which must be financed by 45% equity.

= 1,000,000 * 45%

= $450,000

This will be taken from the Net income which would leave the following for dividends;

= 800,000 - 450,000

= $350,000

Payout ratio = 350,000/800,000

= ‭0.4375‬

= 43.75%

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