Silvana 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 its payout ratio be?
$\begin{array}{l}
\begin{array}{lc}
\text { EBIT } & \$ 2,000,000 \text { Capital budget } \
\text { Interest rate } & 10 \% \% \text { Debt } \
\text { Debt outstanding } & \$ 5,000,000 \% \text { Equity } \
\text { Shares outstanding } & \$ 5,000,000 \text { Tax rate }
\end{array}
\begin{array}{r}
\$ 850,000 \
40 \% \
60 \% \
40 \%
\end{array}
\end{array}$
A) 37.2%
B) 39.1%
C) 41.2%
D) 43.3%
E) 45.5%

Question

Quizplus · Accepted Answer

$\begin{array}{l}
\begin{array} { l l } 
\text { EBIT } & \$ 2,000,000 \text { Capital budget } \
\text { Interest rate } & 10 \% \% \text { Debt } \
\text { Debt outstarding } & \$ 5,000,000 \% \text { Equity } \
\text { Shares outstarding } & \$ 5000,000 T \text { Tax rate }
\end{array}
\begin{array} { r } 
\$ 850,000 \
40 \% \
60 \% \
40 \%
\end{array}
\end{array}$ 
 $\begin{array} { l r } 
\text { EBIT } & \$ 2,000,000 \
\text { - Interest expense } = \text { interestrate } x \text { debt } & 500,000 \
\text { Taxable income } & \$ 1,500,000 \
- \text { Taxes } = \text { Tax rate } \times \text { incore } & 600,000 \
\text { Net income (NI) } & \$ 900,000 \
- \text { Equity needed for capital budget } = \% , \text { Equity(capital budget) } & 510,000 \
\text { Dividends } = \text { NI } - \text { Equity needed } & \$ 390,000 \
\text { Payout ratio } = \text { Dividends/NI } & 43.337
\end{array}$

Silvana Inc A) 372% B) 39

Silvana Inc A) 372%
B) 39