Bulldogs Inc. expects earnings before interest and taxes of P2,500,000 for the coming year. The firm’s capital structure consists of 45% debt and 55% equity, and its marginal tax rate is 25%. The cost of equity is 14%, and the company pays a 12% interest rate on its P5,500,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing P2,000,000, and it will fund this project in accordance with its target capital structure. Assume that new debt will also have an interest rate of 12%. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio? a. 15.32% b. 8.26% c. 21.15% d. 17.4%
Bulldogs Inc. expects earnings before interest and taxes of P2,500,000 for the coming year. The firm’s capital structure consists of 45% debt and 55% equity, and its marginal tax rate is 25%. The cost of equity is 14%, and the company pays a 12% interest rate on its P5,500,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing P2,000,000, and it will fund this project in accordance with its target capital structure. Assume that new debt will also have an interest rate of 12%. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio? a. 15.32% b. 8.26% c. 21.15% d. 17.4%
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 12P
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Bulldogs Inc. expects earnings before interest and taxes of P2,500,000 for the coming year. The firm’s capital structure consists of 45% debt and 55% equity, and its marginal tax rate is 25%. The cost of equity is 14%, and the company pays a 12% interest rate on its P5,500,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project costing P2,000,000, and it will fund this project in accordance with its target capital structure. Assume that new debt will also have an interest rate of 12%. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?
a. 15.32%
b. 8.26%
c. 21.15%
d. 17.4%
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