Walter Industries Is a Family Owned Concern A) ?$2,741,538
B) ?$3,046,154
C) ?$3,384,615
D) ?$3,723,077
E) ?$4,095,385

question 51

Multiple Choice

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 much would the capital budget have to be cut to enable the firm to achieve the new target dividend payout ratio? $$\begin{array} { l r } \% \text { Debt } & 35 \% \\\% \text { Equity } = 1.0 - \% \text { Debt } & 65 \% \\\text { Capital budget under the residual dividend model } & \$ 5,000,000 \\\text { Net income; it will not change this year even if dividends increase } & \$ 3,500,000 \\\text { Equity to support the capital budget = \% Equity } \times \text { Capital budget } & \$ 3,250,000 \\\text { Dividends paid = NI - Equity needed } & \$ 250,000 \\\text { Currently projected dividend payout ratio } & 7.1 \% \\\text { Target dividend payout ratio } & 70.0 \%\end{array}$$

• A) ?$2,741,538
• B) ?$3,046,154
• C) ?$3,384,615
• D) ?$3,723,077
• E) ?$4,095,385

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Definitions:

Cash Dividend

A distribution of profits paid to shareholders in the form of cash, representing a portion of the company's earnings.

Capital Allocation Line

A graph showing risk-return trade-offs of different portfolios, highlighting the efficient frontier of maximum expected return for a given level of risk.

Standard Deviation

A numerical metric that calculates the spread or variability within a dataset.

Risky Portfolio

An investment portfolio that contains a higher percentage of assets with greater volatility and potential for loss, aiming for higher returns.