To find out the payout, we must first figure out the amount of equity we are
retaining for capital budget and then subtract from our Net Income. This
calculation will give us the amount in which will be paid out and we can then
divide this remaining amount by our Net Income to find the payout ratio.
Distribution = Net Income - (Target Equity Ratio * Target Capital Budget)
Net Income$3,000,000
Target Capital Budget$5,000,000
Target Equity Ratio 40%
Distribution =$1,000,000
Knowing our distribution is $1,000,000, we can divide the distribution by Net Income to find the payout ratio.
Distribution$1,000,000
Net Income$3,000,000
Payout Ratio 33.33% or 1:3
