The Scanlon Company\'s optimal capital structure calls for 50 percent debt. The
ID: 2667205 • Letter: T
Question
The Scanlon Company's optimal capital structure calls for 50 percent debt. The interest rate on its debt is a constant 10 percent: its cost of common equity from retained earnings is 14 percent: the cost of equity from new stock is 16 percent; and its marginal tax rate is 40 percent. Scanlon has the following investment opportunities: Project A: Cost = $5 million. IRR = 20% Project B: Cost = $5 million: IRR = 12% Project C: Cost = $5 million: IRR = 9% Scanlon expects to h aw net income of S7.287.500. If Scanlon bases its dividends on the residual policy, what will its payout ratio be?Explanation / Answer
From the residual dividend model, The Scanlon Company satisfies all of its steps. Dividends = Net income - (Target equity ratio * Total capital Budget) Here Net income is $7,287,500 Target equity is 50% - 16%(Common equity-Retained earnings) =34% Total capital budget is $15 million. Dividends = 7,287,500 - (0.34*15,000,000) = 7,287,500 -5,100,000 = 2187500 Dividends payout ratio = Dividends/Net income = 2187500/7,287,500 =0.3017 Dividend payout ratio =30.17% =0.3017 Dividend payout ratio =30.17%Related Questions
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