QUESTION 4

Bharat Tea Plantation (BTP) has the following data and it follows the residual dividend policy.

Capital budget $3,000,000

Net income (NI) $3,500,000

Debt ratio now 20%

[Hint: currently, BTP is 20% debt-financed]

BTP majority shareholders is seeking to have the forthcoming dividends increase. The Chief Financial Officer thinks it is feasible for BTP to increase its debt ratio to 60%.

Required:

1. The percentage of equity in the existing capital structure is?
2. The percentage of debt in the new capital structure is?
3. The equity portion of the capital budget under the existing capital structure is?
4. The equity portion of the capital budget under the new capital structure is?
5. The amount of earnings available to pay out dividend under the existing capital structure is?
6. The amount of earnings available to pay out dividend under the new capital structure is?
7. The dividend payout ratio under the existing capital structure is?
8. The dividend payout ratio under the new capital structure is Answer?
9. What is the increase in the dividend payout ratio under the new capital structure, holding other things constant?