Residual Distribution Model

CFA Level I
#1

Hello ! Can someone provide the math formula or assist me with this question

ACME Inc has generated earnings of $200 Million. Its target capital structure is 60% Equity and 40% Debt. It plans to spend $85 Million on capital projects in the next year and will finance it the same proportion as its capital structure. The company makes distributions in the form of dividends.

What will ACME Inc’s dividend payout ratio be if it follows the Residual Distribution Model policy ?

Thank You

#2

I think the key is what part of the $200 in earnings are spent on capital projects. $85 million in projects times 60% equity equals $51 million. subtracting the 51 from 200 yields a dividend of $149. The dividend payout ratio is the percentage of earnings that are paid out, $149/$200=74.5%.

This is how I would analyze/ answer it.

#3

OK, thank you Ron !