This question seems quite simply, considering the amount of info given. In the question, a target debt/equity ratio is given to calculate the implid dividend payout ratio, but the solution did not use it.
My solution is: (25 mil - 15 mil x 65%)/25 mil = 61%, thus answer C is right. The answer from the textbook is B: (25-15)/10 = 40%.
Am I missing something?
Thanks in advance.
hey pablosdad, I had the same issue with this problem… its actually Q13, you’re referring to… and I did get the same answer as you, but then i analyzed and understood that the solution given in the text was correct…
let me explain:
according to residual dividend policy you should deduct the portion of capital budget, financed with internally generated funds (net income) and corresponding to the equity portion of company’s capital structure…
but here, in the vignette it is said: "Wilson’s board has also approved capital spending of $15 million to be ENTIRELY FUNDED OUT OF THIS YEAR’S EARNINGS)
this means that this 15$ capital budget IS NOT funded 65% equity and 35% debt, but entirely 100% funded with net income… so the residual from you 25$ earnings is (25 mil - 15 mil )/25 = 40% I hope it helps… Good luck
Hey Little Violet, thank you so much for answering this! It makes perfect sense now. (I was comparing this question with the ones that I did correct to see if there was any difference, but didn’t notice the part you mentioned). Thanks again!
you welcome 
