Exercise 10.

drop to 30%. a. Estimate how much cash Conrail will have available to pay dividends or repurchase stocks over the next five years. b. How will the perceived uncertainty associated with these cash flows affect your decision on dividends and equity repurchases? 10. Cracker Barrel, which operates restaurants and gift stores, is reexamining its policy of paying minimal dividends. In 1995, Cracker Barrel reported net income of $66 million; it had capital expenditures of $150 million in that year and claimed depreciation of only $50 million. The working capital in 1995 was $43 million on sales of $783 million. Looking forward, Cracker Barrel expects the following: - Net Income is expected to grow 17% a year for the next five years. - During the five years, capital expenditures are expected to grow 10% a year and depreciation is expected to grow 15% a year. - The working capital as a percentage of revenues is expected to remain at 1995 levels, and revenues are expected to grow 10% a year during the period. RETURNED TO STOCKHOLDERS - The company has not used debt to finance its net capital expenditures and does not plan to use any for the next five years. a. Estimate how much cash Cracker Barrel would have available to pay out to its stockholders over the next five years. b. How would your answer change, if the firm plans to increase its leverage by borrowing 25% of its net capital expenditure and working capital needs? 11. Assume that Cracker Barrel, from Problem 10, wants to continue its policy of not paying dividends. You are the CEO of Cracker Barrel and have been confronted by dissident stockholders, demanding to know why you are not paying out your FCFE (estimated in the previous problem) to your stockholders. How would you defend your decision? How receptive will stockholders be to your defense? Would it make any difference that Cracker Barrel has earned a return on equity of 25% over the previous five years and that its beta is only 1.2 ? 12. Manpower Corporation, which provides nongovernment employment services in the United States, reported net income of $128 million in 1995