Kapler Inc

Multiple Choice

Kapler Inc. expects EBIT of $2,000,000 for the coming year. The firm's capital structure consists of 40 percent debt and 60 percent common equity, and its marginal tax rate is 40 percent. The cost of common equity is 14 percent, and the company pays a 10 percent interest rate on its $5,000,000 of long-term debt. One million shares of common stock are outstanding. In its next capital budgeting cycle, the firm expects to fund one large positive NPV project requiring an investment of $1,200,000, in accordance with its target capital structure. Assume that new debt will also have an interest rate of 10 percent. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?

A) 12.9%
B) 15.1%
C) 16.5%
D) 17.4%
E) 19.3%