The following facts apply to your company:
Target capital structure: 50% debt; 50% equity.
Tax Rate: 40%
Cost of new & old debt 8%
Needs some guidance on capital budgeting
less interest = $20,000,000 = ($500,000,000 * 50%) * 8%
EBT = $180,000,000 = $500,000,000 - $20,000,000
Net Income = EBIT - less interest - Taxes
Net Income = $108,000,000 = $180,000,000 - ($180,000,000 * 40%)
Distribution = 60%
Target equity ratio = $250,000,000
The net income is calculated correctly.
From the net income, dividends will be 60%= 108,000,000X0.6=64,800,000 and the retained earnings will be 108,000,000-64,800,000=43,200,000
We are to find the amount of capital budget. The total capital budget will be ...
The solution explains how to determine the capital budget based on a residual dividend policy