Problem Question: Dividend Policy

Question 1

WelliSYF has found three acceptable investment s opportunities. The three projects require a total of RM3.0 million in financing. It is the companys policy to finance its investments by using 35 percent debt and 65 percent common equity. The firm has generated RM2.20 million dollars from its operations that could be used to finance the common equity portion of its investments.

1. What portion of the new investment will be financed by equity and what portion by debt?
2. According to the residual dividend theory, how much will be paid out as dividends?

Question 2

YongTai Sdn. Bhd. expects EBIT pf RM2,000,000 for the coming year. The firms capital structure consists of 20% debt and 80% equity, and its marginal tax rate is 40%. The company pays a 10% rate on its RM5,000,000 of long-term debt. One million shares of common stock are outstanding. In it next capital budgeting cycle, the firm expects to fund one large positive NPV project costing RM1,200,000, and it will fund this project in accordance to its target capital structure. If the firm follows a residual dividend policy and has no other project:

1. What is its expected dividend payout ratio?
2. What is the expected dividend per share?