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# 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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