A company has a target capital structure that consists of 40 percent debt and 60 percent equity.

Question:

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?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...