Toy Corp.’s target and current capital structure is 45% debt and 55% equity. Management has determined that the optimal capital budget for following year is $17.5 million and has projected net income to be $12.0 million during the next year. The company’s total assets and spontaneous liabilities at the end of the most recent year were $98 million and $15 million, respectively. Assuming Toy uses the residual distribution model (with all distributions in the form of dividends) to determine next year’s dividend payout, what will its expected dividend payout ratio be?
The answer is 20%. Will you show the work for this?