A company has a target capital structure that consists of 40 percent debt and 60 percent equity. The company's capital budget for next year is $10 million. Axel expects net income of $8 million.
The company's cost of capital is 12 percent.
a. How much will the company pay out in dividends if it follows a residual dividend policy?
b. What is the company's dividend payout ratio if it pays the dividends calculated above?
c. Is it likely the company will follow a residual dividend policy? Why or why not?
d. If the company decided to pay out $4.5 million in dividends, how much would it need to raise in equity outside the company?
e. Should the company go ahead with a project of average risk that generates a 10 percent rate of return? Why or why not?
This question was answered on: Jul 11, 2017
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