Problem:
Baker Island Tours (BIT) expects to grow at a constant rate of 4 percent forever. Its target debt/assets ratio is 40 percent, and it expects to have profitable investments of $ 1.3 million this year. BIT plans to continue paying the same dividend that has been paid the past 10 years, $2.25 per share, long into the future. The firm has 500,000 shares of stock outstanding.
Required:
If the net income is expected to be $ 2 million, what should be BIT's dividend payout ratio this year?
Note: Provide support for rationale.