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problem: Selfotech Inc. expects EBIT of $2,000,000 for the current year. The company's capital structure consists of 40% debt & 60% equity, & its marginal tax rate is 40%. The cost of equity is 14%, & the company pays a 10% rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. For the next year, the firm expects to fund one large positive NPV project costing $1,200,000, & it will fund this project in accordance with its target capital structure. If the firm follows a residual dividend policy & has no other projects, find out its expected dividend payout ratio?

[A]   40%

[B]   20%

[C]   0%

[D]   100%

[E]   60%

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M920103

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