diver corporation has plans calling for a capital budget of $50 million. It\'s o
ID: 2650282 • Letter: D
Question
diver corporation has plans calling for a capital budget of $50 million. It's optimal capital structure is 60% equity and 40% debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10% on all its debt, and faces a marginal tax rate of 35%. If the firm maintains a residual distribution policy (with all distributions in the form of dividends) and will keep its optimal capital structure intact: a) calculate the net income b) what is the return in total assets c) what is the return on equity d) what is the retained earnings e) the dividends after financing its capital budgeting diver corporation has plans calling for a capital budget of $50 million. It's optimal capital structure is 60% equity and 40% debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10% on all its debt, and faces a marginal tax rate of 35%. If the firm maintains a residual distribution policy (with all distributions in the form of dividends) and will keep its optimal capital structure intact: a) calculate the net income b) what is the return in total assets c) what is the return on equity d) what is the retained earnings e) the dividends after financing its capital budgeting diver corporation has plans calling for a capital budget of $50 million. It's optimal capital structure is 60% equity and 40% debt. Its earnings before interest and taxes (EBIT) were $98 million for the year. The firm has $200 million in assets, pays an average of 10% on all its debt, and faces a marginal tax rate of 35%. If the firm maintains a residual distribution policy (with all distributions in the form of dividends) and will keep its optimal capital structure intact: a) calculate the net income b) what is the return in total assets c) what is the return on equity d) what is the retained earnings e) the dividends after financing its capital budgetingExplanation / Answer
a) calculate the net income
Net Income = (EBIT - Interest Expenses)*(1-tax rate)
Net Income = (98 - 200*40%*10%) *(1-35%)
Net Income = $ 58.50 Million
b) what is the return in total assets
Return in total assets = Net Income/Total Asset
Return in total assets = 58.50/200
Return in total assets = $ 29.25%
c) what is the return on equity
Equity = 200*60% = $ 120 Million
Return on equity = Net Income/Total Equity
Return on equity = 58.5/120
Return on equity = 48.75%
d) what is the retained earnings
Internal Fund needed = 50*60% = $ 30
As per residual distribution policy
Retained Earning = $ 30 Million
e) the dividends after financing its capital budgeting
Dividends after financing its capital budgeting = 50 - 30
Dividends after financing its capital budgeting = $ 20 Million
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