Practice Problems:

$3.$ Livermore Technologies is a software firm that has never paid a dividend before but its board of directors is considering whether to initiate dividends and if so$,$ how much to pay. You have collected the following information on the firm: The most recent year's income statements is as follows:

Revenues $ $500$ million

$-$Cost of goods sold $ $350$ million $($includes depreciation of $ $40$ million$)$

EBIT $ $150$ million

$-$ Interest expense $ $10$ million

Taxable income $ $140$ million

$-$ Taxes $ $42$ million

Net Income $ $98$ million

The revenues, operating income and depreciation are expected to grow $10\%$ a year for the next $3$ years, but the tax rate for the company will increase to $40\%$ of taxable income.

The non$-$cash working capital is currently $20\%$ of revenues and this ratio is expected to not change over the next $3$ years.

The firm reported capital expenditures of $ $50$ million last year, a level that will be maintained for the next $3$ years.

The firm has an old bank loan of $ $100$ million $($which is the firm's only debt$)$ and it is expected to pay off the entire loan at the end of year $2.$ The firm does not plan any new borrowings for the next $3$ years.

The firm is planning one major acquisition next year and it expects the acquisition to cost $ $50$ million. There are no other acquisitions planned for the next $3$ years.

The current cash balance of the firm is $ $80$ million.

a$.$ Estimate the FCFE for the firm each year for the next $3$ years.

b$.$ Now assume that the firm wants to initiate dividend payments. Assuming that it wants to end up with a cash balance of $ $50$ million at the end of the third year, what percent of net income can the firm afford to pay out as dividends over the three$-$year period?