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Question 3.(15 points)A company has a target capital structure that consists of 45% debt and 55%equity.The company's capital budget for next year is $5 million.The
Question 3.(15 points)A company has a target capital structure that consists of 45% debt and 55%equity.The company's capital budget for next year is $5 million.The company expects net income of $4 million.The company's cost of capital is 11 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 $3.5 million in dividends, how much would it need to raisein 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?
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