# Residual Dividend Question

Capital Spending = 15MM Debt/equity = 35/65 NI = 25MM A. 36% B. 40% C. 60% D. 72%

D… Earnings - (Capex*Equity Ratio) 25-(15*47%) = 71.8%, round to 72%

I don’t exactly know what they are asking but . . . C 15 * .65 = 9.75 or roughly 10 25 - 10 = 15 = residual 15/25 = .6 = 60%

Debt neded to fuel the capital spending = 15*(0.35) = 5.25 Equity neded to fuel the capital spending = 15*(0.65) = 9.75 Residual Amt for Distribution = 25 - 9.75 = 15.25 DPR = 15.25/25 = 0.61 = C??

=(25.000.000,00-0,65*15.000.000,00)/25.000.000,00 61% of the NI will be paid as dividend answer C

darkhelmet, if the question ask to solve 35 divided by 65 your answer (D) is the right one.

This one fecked me up. Is number 21 in reading 33. Goes against the identical Schweser question. Answer: B. \$40% Earnings= 25MM - 15MM in capital spending = 10MM available for dividents. 10.25 = 40% Wh-wh-what as Mrs. Brothloski would say.

I just read this section an hour ago and I’m not sure what the question is asking but I remember clearly somewhere stating that residual income is net income less capital expenditures. Update: I leafed through the 80 pages I read tonight and couldn’t find it.

what is the question asking for? the div payout ratio or the retention rate?

if they pay for all of the capex from income, that would throw their target d/e ratio off, wouldn’t it? unless they stated somewhere in the question they paid for it all out of equity, i don’t see how that answer can be correct. ofcourse, i could be wrong about all of this.

I remember that question… wel sort of. The solution is in the question. They say something about it all been financed out equity. Question was a bit vague though, but thats what they were going for. So 10/25 = 40%

thepinkman Wrote: ------------------------------------------------------- > This one fecked me up. Is number 21 in reading > 33. Goes against the identical Schweser > question. > > Answer: B. \$40% > > Earnings= 25MM - 15MM in capital spending = 10MM > available for dividents. 10.25 = 40% > > Wh-wh-what as Mrs. Brothloski would say. So is B the official answer then??? If so, we all messed up 2 points and after going back over my calc again and reviewing the material, I agree with C being the answer so where the hell is the mistake in the logic that 65% of the capital budget is going to be financed with equity??

It’s C as stated above. Kerry is saying that he thinks there’s an assumption in the book’s version that wasn’t included here saying it was all funded out of equity, in which case it would be 0.4. But as stated above it’s 0.6. Took me forever to figure out what the hell I was supposed to do with that group of numbers.

The whole point is to maintain an optimal WACC. No way a company would pay for all its capital expenditures out of equity when it can finance it in combination with lower costing debt.

Yea, I am going to go with C as the right answer. I thought the whole point of a residual dividend policy is to see what is left after you account for the amount financed by equity.

Listen gz2nyc, in reality there could be many reasons to fund completely out of equity, such as if the capital structure has become over-leveraged driving up the WACC to a non-optimal level (question never says the current level is optimal for the industry), current interest rates are excessively high, existing debt covenants that block further debt financing, specific tax / legal issues, etc. BUT, all of that is irrelevant as all that matters is what is or isn’t said / implied in the question. Which as I pointed out before, given what is supplied above, the answer is C. If the book where it was pulled from said it would be funded completley out of equity for some reason, then in that instance it would obviously be what Kerry said. I think that’s a pretty agreeable stance.

I didn’t check the errata but this comes from the required reading.

If you had posted the full question this wouldn’t have been an issue. The full question: “Assume that Wilson Paper funds its capital spending out of its estimated full year earnings.” Using the residual divident approach, determine Wilson’s implied dividend payout ratio. A 36% B 40% C 60% D 72% Stop at the end of the first sentence in the question and you have your answer. The answer is B…(25 earnings - 15 cap spending = 10 available to be paid…10/25 would give you 40% payout). The “target debt/equity” is given with the other info, but it is not needed in the question. In fact, after a quick scan of the other question it doesn’t appear you need the info in any of the questions associated with the vignette…CFA loves to add extra info that is unnecessary.

My man Sponge Bob comes through HUGE! Thataboy!

Don’t make me biatch slap you, zim!