Axel Telecommunications has a target capital structure of 70% debt and 30% equity and a $3 million capital budget. If net income is $2 million and Axel uses a residual dividend policy (all distributions as dividends), what is the dividend payout ratio?

What the residual dividend model is doing here

The residual dividend policy pays dividends only after the firm has set aside (retained) the earnings needed to support its target equity fraction of next year’s investment (capital budget).

Compute the equity needed for the capital budget

Capital budget: $3{,}000{,}000$

Target equity weight: $0.30$

Required equity financing: $$ 3{,}000{,}000 \times 0.30 = 900{,}000 $$ So Axel should retain $900{,}000$ of earnings to supply the equity portion.

Find dividends as the “residual” of net income

Net income: $2{,}000{,}000$

Dividends paid: $$ \text{Dividends} = 2{,}000{,}000 - 900{,}000 = 1{,}100{,}000 $$

Convert dividends to the dividend payout ratio

$$ \text{Payout ratio} = \frac{1{,}100{,}000}{2{,}000{,}000} = 0.55 = 55\% $$

Quick reasonableness check

Because net income ($2.0$M) is larger than the equity needed ($0.9$M), Axel can both fund its equity requirement and still pay a positive dividend, which matches the residual policy logic.