Your company has decided that its capital budget during the coming year will be RM15 million. Its optimal capital structure is 60% equity and 40% debt. Its earnings before interest and taxes (EBIT) are projected to be RM26 million for the year. The company has RM150 million of assets; its average interest rate on outstanding debt is 10%; there are 6 million common stocks issued and its tax rate is 40%.

a) If the company follows the residual dividend model and maintain the same capital structure, what will its dividend payout ratio be? What is the dividend per share?

b) If the company follows the constant dividend payout ratio of 40% and maintain the same capital structure, does it require raising new equity to finance the equity portion of the capital budget? What is the dividend per share?

Answer rating: 100% (QA)

a If the company follows the residual dividend model and maintains the same capital structure its di... View the full answer