Explore BrainMass

Explore BrainMass

    Residual Dividend Policy

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The following facts apply to your company:
    Target capital structure: 50% debt; 50% equity.

    EBIT: $200,000,000
    Assets: $500,000,000
    Tax Rate: 40%
    Cost of new & old debt 8%

    Based on the residual distribution policy (with all distributions in
    the form of dividends), the payout ratio is 60 percent.
    How large (in millions of dollars) will the capital budget be?

    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

    © BrainMass Inc. brainmass.com June 3, 2020, 8:08 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/residual-dividend-policy-125119

    Attachments

    Solution Preview

    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 ...

    Solution Summary

    The solution explains how to determine the capital budget based on a residual dividend policy

    $2.19

    ADVERTISEMENT