Question

Your company has decided that its capital budget during the coming year will be RM15 million. Its optimal capital structure is 60% equity and 40% debt. Its earnings before interest and taxes (EBIT) are projected to be RM26 million for the year. The company has RM150 million of assets; its average interest rate on outstanding debt is 10%; there are 6 million common stocks issued and its tax rate is 40%.

a) If the company follows the residual dividend model and maintain the same capital structure, what will its dividend payout ratio be? What is the dividend per share?

b) If the company follows the constant dividend payout ratio of 40% and maintain the same capital structure, does it require raising new equity to finance the equity portion of the capital budget? What is the dividend per share?

Answer 1

EBIT 26.00 million

Fresh Equity 9.00 million

Fresh Debt 6.00 million

Existing debt 60.00 million

Total debt 66.000 million

Interest cost 6.600 million

EBT 19.4 million

Tax @ 40% 7.76 million

PAT 11.6 million

a) So leftover earnings after funding new project

PAT 11.64 million

Less: Fresh equity 9.00 million

Dividend 2.64 million

Payout ratio 22.68%

Div per share 0.44

b) Div @ 40% 4.656 million

Div per share 0.776

New equity required 2.016 million