Dividend Policies and Financial Strategies: A Case Study on KeenanCompany's 2012 Dividends and Future Growth1.Residual dividend modelAxel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. Thecompanyanticipates that its capital budget for the upcoming year will be $2,000,000. If Axel reports netincome of $700,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?Round your answer to two decimal places.________%To determine thedividend payout ratiounder theresidual dividend model, follow these steps:Step 1: Calculate the equity portion of the capital budgetAxel Telecommunications follows a target capital structure of70% debt and 30% equity. Given that thetotal capital budget is$2,000,000, the portion financed by equity is:Equityportion=30%×2,000,000=0.30×2,000,000=600,000Step 2: Determine residual earnings available for dividendsThe company's net income is$700,000, and it needs to retain$600,000for reinvestment. The remainingamount available for dividends is:Dividends=NetIncome−Equityportionofcapitalbudget\text{Dividends} =\text{Net Income}-\text{Equityportion of capital budget}Dividends=NetIncome−EquityportionofcapitalbudgetDividends=700,000−600,000=100,000\text{Dividends} = 700,000-600,000 =100,000Dividends=700,000−600,000=100,000Step 3: Calculate the dividend payout ratioThedividend payout ratiois calculated as:Final Answer:14.29%2.Problem 15-2Stock splitGamma Medical's stock trades at $145 a share. The company is contemplating a 3-for-2 stock split.Assuming that the stock split will have no effect on the market value of its equity, what will be the company'sPreview Mode
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