Dirty Dogs Grooming's optimal capital structure calls for 40 percent debt and 60 percent common equity. The company's weighted average cost of capital (WACC) is 10 percent if the amount of retained earnings generated during the year is sufficient to fund the equity portion of its capital budgeting requirements, whereas its WACC is 14 percent if new common stock must be issued. Dirty Dogs has the following independent investment opportunities:
If Dirty Dogs expects to generate net income of $720,000 and it pays dividends according to the residual policy, what will its dividend payout ratio be?