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Maru [420]
3 years ago
12

Silvana Inc. projects the following data for the coming year. If the firm follows the residual dividend policy and also maintain

s its target capital structure, what will its payout ratio be? EBIT $2,000,000 Capital budget $850,000 Interest rate 10% % Debt 40% Debt outstanding $5,000,000 % Equity 60% Shares outstanding $5,000,000 Tax rate 40%
Business
1 answer:
Goshia [24]3 years ago
8 0

Answer:

The dividend payout ratio is 43.33% as shown below

Explanation:

EBIT is an acronym for earnings before interest and tax, it is given as $2 million.In other words, to arrive at net income we need to deduct interest on loan and tax.

EBIT                                                 $2000000

less interest(5000000*10%)         ($500000)

Earnings before tax                       $1500000

Tax @40%                                        ($600000)

Net income                                      $900000

Since capital project requires 60% of equity(net income belongs to equity holders),hence we need to deduct 60% of capital outlay from net income to arrive at distributable earnings.

distributable earnings =$900000-(60%*$850000)

                                     =$390000

Hence dividend payout ratio=distributable earnings/net income

                                               =$390000/$900000

                                                =43.33%

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