Flow-Tech Ltd expects an EBIT of $2,500,000 for the coming year. The company’s target capital structure consists of 40% debt and 60% equity and its tax rate is 40%. The cost of equity is 14% and the company currently pays a 10% interest on its $2,200,000 of long-term debt outstanding. One million shares of common stock are outstanding. In its next capital budgeting cycle, the company expects to finance one large viable project costing $2,000,000, and it will finance this project in accordance with its target capital structure.
Assume that new debts will also have an interest rate of 10%. If the company follows a 30% constant dividend policy and has no other projects, does the company require external financing? What is the expected dividend per share?

Answer rating: 100% (QA)

First we begin by computing the Net Income Net Income can be computed as follows Net Income25... View the full answer