Problem:
Petersen Company has a capital budget of $1.0 million. The company wants to maintain a target capital structure which is 35% debt and 65% equity. The company forecasts that its net income this year will be $700,000.
Required:
Question: If the company follows a residual distribution model and pays all distributions as dividends, what will be its payout ratio?
Note: Explain all steps comprehensively.