Reference no: EM132594594

1) Tijuana Brass Instruments Company treats dividends as a residual decision. It expects to generate $2 million in net earnings after taxes in the coming year. The company has an all-equity capital structure, and its cost of equity capital is 15%. The company treats this cost asthe opportunity cost of "internal" equity financing (retained earnings). Because of flotation costs and underpricing, "external" equity financing (new common stock) is not relied on until internal equity financing is exhausted.

(a) How much in dividends (out of the $2 million in earnings) should be paid if the company has $1.5 million in projects whose expected returns exceed 15%?

(b) How much in dividends should be paid if it has $2 million in projects whose expected returns exceed 15%?

(c) How much in dividends should be paid if it has $3 million in projects whose expected returns exceed 16%? What else should be done?

2)Axis Bhd's management is considering the dividend payout for 2019. The forecasted net income for Axis Bhd is RM600,000. The company's capital structure consists of 40% debt and 60% equity.

Capital expenditure budget is RM800,000.

Calculate the dividend payout ratio using the Residual Dividend Model.