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Puckett Products is planning for $3 million in capital expenditures next year. Puckett's target capital structure...

Puckett Products is planning for $3 million in capital expenditures next year. Puckett's target capital structure consists of 40% debt and 60% equity. If net income next year is $2.6 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

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Answer #1

Residual dividend payout model implies that dividend would be paid out of net income once the required amount for investment project is taken out.

Investment needed = $3 mil

60% of this would be funded from equity

Equity needed = $3 mil * 60% = $1.80 mil

Net Income = $2.6 mil

Dividends = $2.6 mil - $1.8 mil = $0.80 mil

Dividend payout ratio = $0.80mil/$2.6 mil = 30.77%

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