Question 4:

Tong Foong Co. Ltd 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.

Required:

a)How much debt is outstanding (in dollars) and what is the cost of the debt (in dollars) for the period?

b)Compute the Earning After Tax (Net Income)?

c)How much equity is required for the coming year capital budget?

d)If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout (in $) and dividend payout ratio (in %)