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Dividend payout ratio using a residual dividend policy to show the dividend payout ratio percentage.

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Your company has decided that its capital budget during the coming year will be $20 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent. If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout ratio be?

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Solution Summary

With formulas and calculations, the solution is worked through to show the dividend payout ratio percentage.

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Capital budget = 20
EBIT = 34.667
Asset = 200
Kd = 10%
t = 40%

The firm's current debt = 40% * 200 = 80
So the interest ...

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