7.7. Burns Corporation has the following capital structure: $100 million in bond

Question

7.7. Burns Corporation has the following capital structure: $100 million in bonds, selling at par with coupon 5%; 50 million shares of common stock, priced at $25 each; and 1.5 million shares of preferred stock with an annual dividend of $3.00 each. Next year, the company expects to have EBIT of $70 million out of which it wants to keep $10 million in retained earnings. The tax rate of the company is 35%. Find the dividend that it should declare on the common stock. What is the dividend yield of this stock?

Explanation / Answer

The working is as shown Below:

EBIT $    7,00,00,000.00 Interest on Debt $       50,00,000.00 Dividend on Preferred Shares $       45,00,000.00 Earnings before Tax $    6,05,00,000.00 Tax at 35% $    2,11,75,000.00 Net Profit $    3,93,25,000.00 Retained Earnings $    1,00,00,000.00 Available for dividends $    2,93,25,000.00 Total Number of Shares 50000000 Dividend per share tha can be declared $                   0.5865 Dividend Yield 2.35%

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