1. Learning Objective 15-3 Problem 14-1. Residual dividend model Axel Telecommunications has a target capital structure that consists of 60% debt and 40% equity. The company anticipates that its capital budget for the upcoming year will be $2,000,000. If Axel reports net income of $900,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? Round your answer to two decimal places. ?% -------------------------------------------------------------------------------- 2. Learning Objective 15-6 Problem 15-2. Stock split Gamma Medical's stock trades at $110 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company's stock price following the stock split? Round your answer to two decimal places. ________ -------------------------------------------------------------------------------- 3. Learning Objective 15-7 Problem 15-3. Stock repurchases Beta Industries has net income of $3,700,000 and it has 495,000 shares of common stock outstanding. The company's stock currently trades at $75 a share. Beta is considering a plan in which it will use available cash to repurchase 15% of its shares in the open market. The repurchase is expected to have no effect on either net income or the company's P/E ratio. What will be its stock price following the stock repurchase? Round your answer to two decimal places. ________ -------------------------------------------------------------------------------- 4. Learning Objective 15-6 Problem 15-4. Stock split After a 4-for-1 stock split, the Strasburg Company paid a dividend of $0.51 per new share, which represents a 8% increase over last year's pre-split dividend. What was last year's dividend per share? Round your answer to two decimal places. ________ -------------------------------------------------------------------------------- 5. Learning Objective 15-3 Problem 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 plans to expand production capacity by 20% with a $20 million investment in plant and machinery. The firm wants to maintain a 40% debt-to-total-assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 30% of last year's net income. In 2005, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2006 to expand capacity as desired? Assume the firm uses only debt and common equity in its capital structure. Round your answer to two decimal places. ____________ -------------------------------------------------------------------------------- 6. Learning Objective 15-3 Problem 15-6. Residual dividend model The Welch Company is considering three independent projects, each of which requires a $3 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects is presented below: Project H (High risk): Cost of capital = 18%; IRR = 22% Project M (Medium risk): Cost of capital = 12%; IRR = 16% Project L (Low risk): Cost of capital = 8%; IRR = 8% 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. Welch expects to have net income of $13,422,500. If Welch establishes its dividends from the residual model, what will be its payout ratio? Round your answer to two decimal places. ?% -------------------------------------------------------------------------------- 7. Learning Objective 15-3 Problem 15-7. Dividends Bowles Sporting Inc. is prepared to report the following income statement (shown in thousands of dollars) for the year 2006. Sales $ 1 2 , 8 0 0 Operating costs including depreciation 9 , 8 5 6 EBIT $ 2 , 9 4 4 Interest 2 6 4 EBT $ 2 , 6 8 0 Taxes (40%) 1 , 0 7 2 Net income $ 1 , 6 0 8 Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 310,000 shares of stock outstanding and its stock trades at $53 per share. a. The company had a 25% dividend payout ratio in 2005. If Bowles wants to maintain this payout ratio in 2006, what will be its per-share dividend in 2006? Round your answer to two decimal places. b. If the company maintains this 25% payout ratio, what will be the current dividend yield on the company's stock? Round your answer to two decimal places. ?% c. The company reported net income of $1.45 million in 2005. Assume that the number of shares outstanding has remained constant. What was the company's per-share dividend in 2005? Round your answer to two decimal places. d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per-share dividend in 2006 that it paid in 2005. If it chooses this policy, what will be the company's dividend payout ratio in 2006? ?% e. Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend? _________________ I. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm not to expand. II. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain the same per-share dividend. III. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to maintain a constant dividend payout ratio. IV. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to issue new debt. V. Since the company would like to avoid transactions costs involved in issuing new equity, it would be best for the firm to issue new preferred stock. -------------------------------------------------------------------------------- 8. Learning Objective 15-3 Learning Objective 15-6 Problem 15-8. Alternative dividend policies Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.4 out of annual earnings per share of $4.25. Currently, Rubenstein Bros.' stock is selling for $25.50 per share. Adhering to the company's target capital structure, the firm has $9 million in assets, of which 25% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based upon the above information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate