Finance Assignment 4 questions

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Business Finance

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Annswer the question 15-1, 15-2, 15-3, 15-5.

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rt 5 Capital Structure and Dividend Policy 15-2 split? 15-3 ing a 3-for-2 stock split. Assuming that the stock split will have no effect on the market STOCK SPLIT Gamma Medical's stock trades at $90 a share. The company is contemplate value of its equity, what will be the company's stock price following the stocks STOCK REPURCHASES Beta Industries has net income of $2,000,000, and it has 1,000.00 shares of common stock outstanding. The company's stock currently trades at $32 a share. in the open market. The repurchase is expected to have no effect on net income or its stock Beta is considering a plan in which it will use available cash to repurchase 20% of its shares STOCK SPLIT After a 5-for-1 stock split, Strasburg Company paid a dividend of $0.75 per new share, which represents a 9% increase over last year's pre-split dividend. What was last year's dividend per share? price. What will be Beta's EPS following the stock repurchase? 15-4 ermediate blems . -15-5 EXTERNAL EQUITY FINANCING Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management machinery. The firm wants to maintain a 40% debt level in its capital structure. It also wants to maintain its past dividend policy of distributing 45% of last year's net income. In 2015, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2016 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure. 15-6 RESIDUAL DIVIDEND MODEL Welch Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Cost of capital = 16% IRR = 20% Project H (high risk): Project M (medium risk): Project L (low risk): Cost of capital = 12% IRR = 10% Cost of capital = 8% IRR = 9% Note that the projects' costs of capital vary because the projects have different levels of risk The company's optimal capital structure calls for 50% debt and 50% common equity , and it expects to have net income of $7,287,500. If Welch establishes its dividends from the residual dividend model, what wi be its payout ratio? enging 15-7 ems ment (shown in thousands of dollars). DIVIDENDS Bowles Sporting Inc. is prepared to report the following 2015 income state Sales Operating costs including depreciation $15,200 EBIT 11,900 Interest $ 3,300 EBT 300 Taxes (40%) $ 3,000 Net income 1,200 Prior to reporting this income statement dividend. The com $ 1,800 trad 15-8 15-9 15-10 a. interrelationships among cost of capital, investment opportunities, and new investment and (2) to explain the implied relationship between dividend policy and stock prices. What is the difference between a stock dividend and a stock split? As a stockholder, would you prefer to see your company declare a 100% stock dividend or a two-for-one split? Assume that either action is feasible. Most firms like to have their stock selling at a high P/E ratio, and they also like to have extensive public ownership (many different shareholders). Explain how stock dividends or stock splits may help achieve those goals. Indicate whether the following statements are true or false. If the statement is false, explain why. If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to capital gains taxes. If you own 100 shares in a company's stock and the company's stock splits two-for-one, you will own 200 shares in the company following the split. Some dividend reinvestment plans increase the amount of equity capital available to the firm. d. The Tax Code encourages companies to pay a large percentage of their net income in the form of dividends. If your company has established a clientele of investors who prefer large dividends, the company is unlikely to adopt a residual dividend policy. f. If a firm follows a residual dividend policy, holding all else constant, its dividend payout will tend to rise whenever the firm's investment opportunities improve. What is meant by catering theory, and how might it impact a firm's dividend policy? b. C. e. 15-11 IS 15-1 RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?
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Finance Assignment 4 questions
Problem 15-1
RESIDUAL DIVIDEND MODEL Axel Telecommunications has a target capital structure that consists
of 70% debt and 30% equity. The company anticipates that is capital budget for the upcoming year
will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual dividend payout
policy, what will be its dividend payout ratio?

Solution:

Net Income

2,000,000.00

Retained Earnings ( 30% * 3,000,000 )

900,000.00

Dividends Paid

1,100,000.00

Dividend per share ratio

Dividends paid / Equity Capital
1,100,000 / 900,000
1.22

Earnings per share

Net Income / Equity...


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