Talk:Dividend payout ratio

Dividend policies need clarification and references

Under strict residual dividends/Income policies , dividends payout ratio decreases when strategic capital expenditure are allocated to a lower debt to equity ration (where capital equity is more than debt)

Clarification: A strict dividend policy guides a company's management to pay no more (and no less) in dividends from net income to generate a change in equity that produces or maintains a targeted capital structure. The dividend pay out ratio is the ratio of dividends to income. The call of the question requires the calculation of the ratio of dividends to income assuming income, capital projects and capital structure amounts as follows:

Income = $800,000 Capital projects planned at $1,200,000 Capital structure is 40/60

Capital projects, by definition, are to be funded: Debt (40%) $ 480,000 Equity (60%) 720,000 Total $1,200,000

Assuming the company is in compliance with the 40/60 Debt/Equity capital structure to begin with, 60% of the $1,200,000 in capital projects will be financed by additions to equity the come from new earnings of $800,000. The equity funded portion of capital projects is $720,000 ($1,200,000 x 60%). Following a strict residual dividend policy, the company will pay out the difference between is additions to equity ($800,000 in income) and the amounts reinvested in the business ($720,000). The dividend will be $80,000. ($800,000 - $720,000).

The historic data section does not follow quality guidelines, including using a reference to a footnote in text. — Preceding unsigned comment added by Narbdance (talk • contribs) 05:22, 6 March 2011 (UTC)

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