Tremblay Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend

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Tremblay Corporation is reviewing its capital budget for the upcoming year. It has paid a $3.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain constant for the next several years. The company's target capital structure is 60% equity and 40% debt; it has 1,000,000 shares of common equity outstanding; and its net income is $8 million. The company forecasts that it would require $10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year.
a. If Tremblay follows the residual model and makes all distributions as dividends, how much retained earnings will it need to fund its capital budget?
b. If Tremblay follows the residual model with all distributions in the form of dividends, what will be the company's dividend per share and payout ratio for the upcoming year?
c. If Tremblay maintains its current $3.00 DPS for next year, how much retained earnings will be available for the firm's capital budget?
d. Can the company maintain its current capital structure, maintain the $3.00 DPS, and maintain a $10 million capital budget without having to raise new common stock?
e. Suppose that Tremblay's management is firmly opposed to cutting the dividend; that is, it wishes to maintain the $3.00 dividend for the next year. Also assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the company's capital budget. Assume that the resulting change in capital structure has a minimal impact on the company's composite cost of capital, so that the capital budget remains at $10 million. What portion of this year's capital budget would have to be financed with debt?
f. Suppose once again that Tremblay's management wants to maintain the $3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity, 40% debt), and maintain its $10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue in order to meet each of its objectives?
g. Now consider the case where Tremblay's management wants to maintain the $3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget in order to meet its other objectives. Assuming that the company's projects are divisible, what will be the company's capital budget for the next year?
h. What actions can a firm that follows the residual distribution policy take when its fore- cast retained earnings are less than the retained earnings required to fund its capital budget? Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Financial Management Theory and Practice

ISBN: 978-0176517304

2nd Canadian edition

Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason

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