Problem:
Victor Corporation has a capital budget of $5 million and wants to maintain a capital structure of 40% debt and 60% equity. The company expects net income of $4 million.
Required:
Question: What is the expected dividend payout ratio if the company follows a residual dividend policy?
- 50%
- 40%
- 20%
- 25%
- none of the above
Note: Provide support for your underlying principle.