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.

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.

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.

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

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

Resources

About the Author

Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.