Strategic Systems Inc. expects to have net income of $800,000 during
the next year. Its target, the current, capital structure is 40
percent debt and 60 percent common equity. The Director of Capital
Budgeting has determined that the optimal capital budget for next year
is $1.2 million. If Strategic uses the residual dividend model to
determine next year’s dividend payout, what is the expected dividend
payout ratio?





0 	0% 	A . 	0%
0 	0% 	B . 	10%
0 	0% 	C . 	28%
0 	0% 	D . 	42%
0 	0% 	E . 	56%

jucylove - 

To find residual income, we first need to find the correct equity and
debt allocation.

Of a $1.2 million capital budget, 
0.6 x 1.2m = $720,000 must be allocated to equity
Therefore, 0.4 x 1.2m = $480,000 will be debt

Since net income is $800,000,
residual is -

net income - equity = residual dividend

or

$800,000 - $720,000 = $80,000

The residual dividend is therefore $80,000

The payout ratio is calculated as -

residual dividend / net income = 80,000 / 800,000 = 0.1 = 10%

The answer should therefore be B.

thanks,
ragingacademic

Thanks, baby!