alter Industries is a family owned concern. It has been using the residual dividend model, but family members who hold a majority of the stock want more cash dividends, even if that means a slower future growth rate. Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy change to the indicated target payout ratio. By how much would the capital budget have to be cut to enable the firm to achieve the new target dividend payout ratio? % Debt 41% % Equity = 1.0 % Debt 59% Capital budget under the residual dividend model $5,000,000 Net income; it will not change this year even if dividends increase $3,500,000 Equity to support the capital budget = % Equity Capital budget $2,950,000 Dividends paid = NI Equity needed $550,000 Currently projected dividend payout ratio 84.3% Target dividend payout ratio 75%

Walter Industries is a family owned concern. It has been using the residual dividend model, but family members who hold a majority of the stock want more cash dividends, even if that means a slower future growth rate. Neither the net income nor the capital structure will change during the coming year as a result of a dividend policy change to the indicated target payout ratio. By how mu would the capital budget have to be cut to enable the firm to achieve the new target dividend payoi ratio? % Debt % Equity-1.0-90 Debt Capital budget under the residual dividend model Net income; it will not change this year even if dividends increase Equity to support the capital budget-% Equity x Capital budget Dividends paidNI - Equity needed Currently projected dividend payout ratio Target dividend payout ratio 41% 5990 $5,000,000 $3,500,000 $2,950,000 $550,000 84.3% 5%