Boothe Co Expects EBIT of $3,000,000 for the Coming Year

Essay

Boothe Co. expects EBIT of $3,000,000 for the coming year. The firm's capital structure consists of 30 percent debt and 70 percent common equity, and its marginal tax rate is 40 percent. The cost of common equity is 15 percent, and the company pays an 11 percent interest rate on its $6,000,000 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 $1,600,000, in accordance with its target capital structure. Assume that new debt will also have an interest rate of 11 percent. If the firm follows a residual dividend policy and has no other projects, what is its expected dividend payout ratio?