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Residual Distribution Model Puckett Products is planning for $2.2 million in capital expenditures next year. Puckett's...

Residual Distribution Model

Puckett Products is planning for $2.2 million in capital expenditures next year. Puckett's target capital structure consists of 50% debt and 50% equity. If net income next year is $2.9 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

According to residual dividend distribution model, the net income is first used to fund the capital plan of the company for next year, and the amount remaining post that is paid out as dividend.

Now, next year company is thinking of capex of $2.2 million.

50% of that would be funded through equity, hence $1.1 million is required from net income

Dividend = $2.9 million - $1.1 million = $1.8 million

Dividend Payout Ratio = Dividend/Net Income = $1.8 million/$2.9 million = 62.07%

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