Question: JLChem Corporation a chemical manufacturing firm with changing investment opportunities

JLChem Corporation, a chemical manufacturing firm with changing investment opportunities, is considering a major change in dividend policy. It currently has 50 million shares outstanding and pays an annual dividend of $2 per share. The firm current and projected income statement are provided below (in millions):
The firm’s current capital expenditure is $500 million.
It is considering five projects for the next year:
The firm’s current beta is 1.0 and the current Treasury bill rate is 5.5%. The firm expects working capital to increase $50 million both this year and the next. The firm plans to finance its net capital expenditures and working capital needs with 30% debt.
a. What is the firm’s current payout ratio?
b. What proportion of its current FCFE is it paying out as dividends?
c. What would your projected capital expenditure be for next year (i.e., which of the five projects would you accept and why)?
d. How much cash will the company have available to pay out as dividends next year? (What is the maximum amount the company can pay out as dividends?)
e. Would you pay out this maximum amount as dividends? Why or why not? What other considerations would you bring to this decision?
f. JKL Corporation currently has a cash balance of $100 million (after paying the current year’s dividends). If it pays out $125 million as dividends next year, what will its projected cash balance be at the end of the next year?

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  • CreatedApril 15, 2015
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