Petersen Co

question 10

Multiple Choice

Petersen Co. has a capital budget of $1,200,000. The company wants to maintain a target capital structure that is 60 percent debt and 40 percent equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual distribution policy (with all distributions in the form of dividends) , what will be its payout ratio?

• A) 0%
• B) 20%
• C) 40%
• D) 60%
• E) 80%

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Definitions:

Weighted Average

A method of calculating an average whereby each component of the dataset contributes to the total average in proportion to its assigned weight.

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and satisfy its investors.

Leveraged Value

Utilizing a range of financial tools or leveraging debt to amplify the possible gains from an investment.

Capital Structures

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, constituting how a firm finances its overall operations and growth.