How much of the capital budget should be cut to allow

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Question - Kafegama Corp. is a family-owned company and has used a residual dividend model, but family members who hold the majority of shares want more cash dividends, even though this results in a slower rate of future growth for the company. Neither net income nor capital structure will change over the coming year as a result of changing the dividend policy to the indicated payout ratio target.

% Debt = 60%

% Equity = 1.0 - % Debt = 40%

Capital budget under the residual dividend model $5,000,000

Net income $3,500,000

The target dividend payout ratio is 80%

How much of the capital budget should be cut to allow the company to reach the new target dividend payout ratio?

Reference no: EM133088031

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