Dentaltech Inc.projects the following data for the coming year.If the firm follows the residual dividend policy and also maintains its target capital structure,what will be its payout ratio? $\begin{array}{lrlr}
\text { EBIT } & \$ 2,000,000 & \text { Capital budget } & \$ 850,000 \
\text { Interest rate } & 10 \% & \% \text { Debt } & 40 \% \
\text { Debt outstanding } & \$ 5,000,000 & \% \text { Equity } & 60 \% \
\text { Shares outstanding } & \$ 5,000,000 & \text { Tax rate } & 40 \%
\end{array}$
A)37.2%
B)39.1%
C)41.2%
D)43.3%

Question

Quizplus · Accepted Answer

First, calculate the net income:- EBIT = $2,000,000- Interest = 10% of $5,000,000 = $500,000- EBT (Earnings Before Taxes) = EBIT - Interest = $2,000,000 - $500,000 = $1,500,000- Taxes = 40% of EBT = 40% of $1,500,000 = $600,000- Net Income = EBT - Taxes = $1,500,000 - $600,000 = $900,000Next, calculate the equity portion of the capital budget:- Total capital budget = $850,000- Equity portion = 60% of $850,000 = $510,000Finally, calculate the payout ratio:- Residual = Net Income - Equity portion of capital budget = $900,000 - $510,000 = $390,000- Payout Ratio = Residual / Net Income = $390,000 / $900,000 = 43.3%

Dentaltech Inc A)372% B)39

Dentaltech Inc A)372%
B)39