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Residual dividend policy

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Saturn Inc. expects to have net income of $20,000,000 during the next year. Saturn's target capital structure is 35 percent debt and 65 percent equity. The company's director of capital budgeting has determined that the optimal capital budget for the coming year is $24,000,000. If Saturn follows a residual dividend policy to determine the coming year's dividend, then what is Saturn's payout ratio? You will receive 5 points each for calculating the earnings that must be retained to stay at the target ratio, the residual amount available for dividends and 10 pts for the payout ratio.

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The solution explains the calculations under residual dividend policy

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In a residual dividend policy, the company first sets aside the net income for investment and then if any net income is left it is distributed ...

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