CFA Level 1: Dividend Payout Ratio Calculation

Dividend Payout Ratio

Prev Question Next Question

Question

Your company 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. If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout ratio be?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

E

Capital budget = $20 million.

Optimal capital structure: 60% equity, 40% debt.

EBIT = $34.667 million.

Assets = $200 million.

k(d) = 10%; T = 40%. Dividend Payout = ?

Debt = 0.40($200 million) = $80 million.

Interest = 0.10($80 million) = $8 million.

EBIT$34.667 -

-INT8.000

EBT$26.667 -

Taxes (40%)10.667 -

NI$16.000 -

Equity needed = 0.60($20 million) = $12 million.

Net Income$16 -

-Equity needed12

Amount left for dividend$4 -

Dividend Payout = $4/$16 = 25%.

Prev Question Next Question