Question 1 Not yet answered Marked out of 10.00 Flag question West Steel Company (WSC) was...

Transcribed Image Text:

Question 1 Not yet answered Marked out of 10.00 Flag question West Steel Company (WSC) was formed 5 years ago to exploit a new continuous casting process. WSC's founders, Robert Prechter and Kate Peter, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Prechter and Peter had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital in comparison with the typical steel company, so Prechter and Peter have been able to avoid issuing new stock and thus own all of the shares. However, WSC has now reached the stage at which outside equity capital is necessary if the firm is to achieve its growth targets. Therefore, Prechter and Peter have decided to take the company public. Until now, Prechter and Peter have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Assume you were recently hired by Price Water Company (PWC), a national consulting firm that has been asked to help WSC prepare for its public offering. Nancy Jackson, the senior PWC consultant in your group, has asked you to make a presentation to Prechter and Peter in which you review the theory of dividend policy and discuss the following issues. A. Assume that WSC has completed its IPO and has a $120 million capital budget planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal, and its net income is forecasted at $150 million. Use the residual distribution approach to determine WSC's total dollar distribution. B. Assume for now that the distribution is in the form of a dividend. Suppose WSC has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $96 million? To increase to $170 million? C. As mentioned previously, WSC has 100 million shares of stock outstanding. Suppose market price is $20 per share. The firm has $250 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the WSC value of operations, and how many shares will remain after the repurchase? (Note: Value of Operations + Value of Short term Investment = Value of Equity + Value of Debt) Question 1 Not yet answered Marked out of 10.00 Flag question West Steel Company (WSC) was formed 5 years ago to exploit a new continuous casting process. WSC's founders, Robert Prechter and Kate Peter, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Prechter and Peter had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital in comparison with the typical steel company, so Prechter and Peter have been able to avoid issuing new stock and thus own all of the shares. However, WSC has now reached the stage at which outside equity capital is necessary if the firm is to achieve its growth targets. Therefore, Prechter and Peter have decided to take the company public. Until now, Prechter and Peter have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Assume you were recently hired by Price Water Company (PWC), a national consulting firm that has been asked to help WSC prepare for its public offering. Nancy Jackson, the senior PWC consultant in your group, has asked you to make a presentation to Prechter and Peter in which you review the theory of dividend policy and discuss the following issues. A. Assume that WSC has completed its IPO and has a $120 million capital budget planned for the coming year. You have determined that its present capital structure (80% equity and 20% debt) is optimal, and its net income is forecasted at $150 million. Use the residual distribution approach to determine WSC's total dollar distribution. B. Assume for now that the distribution is in the form of a dividend. Suppose WSC has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $96 million? To increase to $170 million? C. As mentioned previously, WSC has 100 million shares of stock outstanding. Suppose market price is $20 per share. The firm has $250 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the WSC value of operations, and how many shares will remain after the repurchase? (Note: Value of Operations + Value of Short term Investment = Value of Equity + Value of Debt)