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Homework answers / question archive / 1) What is the maximum dividend payout ratio consistent with no requiring external funds for a firm with ROE of 16%, a debt-equity ratio of 60%, and an internal growth rate of 8%? 2) Day's Delivery is an un-levered firm with an EBIT of $90,000

1) What is the maximum dividend payout ratio consistent with no requiring external funds for a firm with ROE of 16%, a debt-equity ratio of 60%, and an internal growth rate of 8%? 2) Day's Delivery is an un-levered firm with an EBIT of $90,000

Finance

1) What is the maximum dividend payout ratio consistent with no requiring external funds for a firm with ROE of 16%, a debt-equity ratio of 60%, and an internal growth rate of 8%?

2) Day's Delivery is an un-levered firm with an EBIT of $90,000. The un-levered weighted average cost of capital is 11% and the tax rate is 34%. What is the value of this firm?

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1) Computation of the dividend payout ratio:-

Debt-equity ratio = 60%

Debt = 0.60

Equity = 1

ROE = Net income / Equity

16% = Net income / 1

Net income = 16% * 1

= 0.16

Total assets = Debt + Equity

= 0.60 + 1

= 1.60

ROA = Net income / Total assets

= 0.16 / 1.60

= 10%

Internal Growth Rate = (1 - Dividend Payout Ratio) * ROA

8% = (1 - Dividend payout ratio) * 10%

(1 - Dividend payout ratio) = 8% / 10%

Dividend payout ratio = 1 - 80%

= 20%

2) Computation of the value of the firm:-

Value of firm = EBIT*(1-Tax rate) / Unlevered cost of capital

= $90,000*(1-34%) / 11%

= $59,400 / 11%

= $540,000

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