Crickentree has a target capital structure of 30% debt and 70% equity. If the firm expects to have a net income of $1.7 million and a dividend payout ratio of 40%, what will be its equity break point?

Question

Quizplus · Accepted Answer

Step 1: Find the net income available for equity.

Net income = $1.7 million
Dividend payout ratio = 40%
Retained earnings = Net income - Dividends
Retained earnings = $1.7 million x (1-0.4) = $1.02 million

Step 2: Find the equity break point.

Equity break point = Retained earnings / Equity percentage
Equity break point = $1.02 million / 0.7
Equity break point = $1,457,143

Crickentree Has a Target Capital Structure of 30% Debt and 70