Integrated Waveguide Technologies (IWT) is a 6-year-old companyfounded by Hunt Jackson and David Smithfield to exploitmetamaterial plasmonic technology to develop and manufactureminiature microwave frequency directional transmitters andreceivers for use in mobile Internet and communicationsapplications. IWT's technology, although highly advanced, isrelatively inexpensive to implement, and its patented manufacturingtechniques require little capital as compared to many electronics'fabrication ventures. Because of the low capital requirement,Jackson and Smithfield have been able to avoid issuing new stockand thus own all of the shares. Because of the explosion in demandfor its mobile Internet applications, IWT must now access outsideequity capital to fund its growth, and Jackson and Smithfield havedecided to take the company public. Until now, Jackson andSmithfield have paid themselves reasonable salaries but routinelyreinvested all after-tax earnings in the firm, so dividend policyhas not been an issue. However, before talking with potentialoutside investors, they must decide on a dividend policy. Your newboss at the consulting firm Flick and Associates, which has beenretained to prepare for its public offering and has asked you toaddress the following issues:

Assume that IWT has completed its IPO and has a $112.5million capital budget planned for the coming year. You havedetermined that its present capital structure (80% equity and 20%debt) is optimal, and its net income is forecasted at $140 million.Use the residual distribution approach to determine IWT's totaldollar distribution. Assume for now that the distribution is in theform of a dividend. Suppose IWT has 100 million shares of stockoutstanding. What is the forecasted dividend payout ratio?What isthe forecasted dividend per share? What would happen to the payoutratio and DPS if net income were forecasted to decrease to $90million? To increase to $160 million.