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Unformatted text preview: he company has a target capital structure that consists of 50 percent equity and 50 percent long‐term debt. What is the company's anticipated dividend payout ratio? a. 75% b. 55% c. 50% d. 25% e. 47% Answer is a. Since the capital budget is $250 million and the capital structure is 50% equity and 50% debt, $125 million of the capital budget will come from debt and $125 million will come from equity. Subtracting the $125 million (needed for the equity portion) from NI, leaves $375 million to pay out as dividends. $375/$500 is a 75% payout ratio. 2. Which of the following statements best describes the theories of investors' preferences for dividends? a. Modigliani and Miller argue that investors prefer dividends to capital gains. b. The bird‐in‐hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio. c. The tax preference theory suggests that a company can increase its stock price by increasing its dividend payout ratio. d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy. e. The clientele effect suggests that...
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