What is the expected dividend payout for this budget year

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Question - Smith & Rock Entertainment Inc.'s CFO has determined the optimal capital structure is 30 percent debt and 70 percent equity. The company's WACC is 12% assuming the amount of earnings that can be retained and reinvested is adequate to fund the total equity portion (70%) of the current year's proposed capital budget. However if the capital budget requires the company raise new equity by issuing new common shares then the WACC will increase to 15%. The CFO estimates net income will be $400,000 this year and it pays dividends in accordance with the residual policy. It has two large independent capital projects being proposed: Project A is a $500,000 project (cost) with an IRR estimate 17.0% and Project B is a $450,000 project with an estimated IRR of 14%. The company follows a residual dividend policy. What is the expected dividend payout for this budget year?

Reference no: EM133170101

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