How to Calculate Required External Financing With Dividend Payouts

by Ryan Menezes

Any single dividend payout reveals the amount of equity that a company has. The dividend payout is a fraction of the company's net income, and the size of the fraction depends on how much equity the investor has contributed with respect to the company's total equity. When a company has a target level of equity that they want for operations, the external financing they need is the difference between that level and their current equity.

Step 1

Divide the value of an investor's dividends by the company's net income for the period. For example, if someone who has invested $500 with a company making a net income of $3,000 receives $40 in dividends, divide $40 by $3,000, giving 0.0133.

Step 2

Divide the equity that the investor has contributed by this ratio. Continuing the example, divide $500 by 0.0133, giving $37,593.98. This is the company's current equity level.

Step 3

Subtract this level from the value of the equity that the company needs. For example, if the company wants to accumulate $50,000 of equity, subtract $37,593.98 from $50,000, giving $12,406.02. This is the value of the company's required external financing.

References (2)

  • "Cornerstones of Financial & Managerial Accounting..."; Jay S. Rich et. al.; 2009
  • "Principles of Accounting"; Belverd E. Needles, et al.; 2010

Resources (2)