Exam1Q8 - answer: $22.5 million Calculate interest cost:...

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Corporation faces an IOS schedule calling for a capital budget of $60 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10 percent on all its debt, and faces a marginal tax rate of 35 percent. If the firm maintains a residual dividend policy and will keep its optimal capital structure intact, what will be the amount of the dividends it pays out after financing its capital budget? * $30.0 million * $59.4 million * $22.5 million * $60.0 million * $0 That answer is incorrect. Correct
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Unformatted text preview: answer: $22.5 million Calculate interest cost: Total assets = $200M; 40% debt x $200M = $80 million in debt. Interest cost = $80M x 0.10 = $8.0 million. Calculate net income (in millions): EBIT $98.0 less: Interest - 8.0 EBT $90.0 less: Taxes (35%) 31.5 Net income $58.5 Calculate portion of projects financed with retained earnings: IOS contains $60 million in positive NPV projects. Retained earnings portion: $60M x 0.60 = $36.0 million Debt portion: $60M x 0.40 = $24.0 million Calculate residual available for dividends: $58.5M - $36.0M = $22.5 million in dividends. ---------...
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This note was uploaded on 12/14/2010 for the course FIN 422 taught by Professor Sridharsundaram during the Fall '09 term at Grand Valley State University.

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