Income tax rate Capital Gains Tax Rate Assumed long-term sustainable growth rate
ID: 2803417 • Letter: I
Question
Income tax rate Capital Gains Tax Rate Assumed long-term sustainable growth rate 40% 15% 5% WACC facts Barking Dog Corp Cost of Capital Given: Optimal Capital Structure 20% Debt 10% Preferred Equity 70% Common Equity Net income for the coming year: $4,000,000 Use Retained Earnings for common equity until all but $1.5 M are exhausted. Dividends policy is to distribute 60% of NI as dividends. Currently 0 retained earnings Borrowing Limits and Interest Rates Amount Borrowed tere 5% 9% 0 to $1,500,000 over $1,5000,000 Use the average of CAPM and Dividends growth model for rRE Common Stock price $66 Preferred Stock price S30 $2for this year $6 for the coming year 5% 10% of the market price Float %; Tax rate: For CAPM: 40% 8.5% 35% 1.05 RFExplanation / Answer
Solution :- Net income = $ 4000000.
Dividend = 60 % of Net income.
= 60 % of 4000000
= $ 2400000.
Retained earnings = Net income - Dividend.
= 4000000 - 2400000
= $ 1600000.
Conclusion :-
Dividend $ 2400000. Retained earnings $ 1600000.