Question 1.

Axel Telecommunications has a target capital structure that consists of 65% debt and 35% equity. The company anticipates that its capital budget for

the upcoming year will be $3,000,000. If Axel reports net income of $1,300,000 and it follows a residual dividend payout policy, what will be its dividend

payout ratio? Round your answer to two decimal places.

Gamma Medical’s stock trades at $145 a share. The company is contemplating a 3­for­2 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 the nearest cent.

3. Beta Industries has net income of $300,000, and it has 985,000 shares of common stock outstanding. The

company’s stock currently trades at $37 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 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.

After a 3­for­1 stock split, Strasburg Company paid a dividend of $0.8 per new share, which represents a 8% increase over last year’s pre­split

dividend. What was last year’s dividend per share? Round your answer to the nearest cent.

Northern Pacific Heating and Cooling Inc. has a 6­month backlog of orders for its patented solar heating system. To meet this demand, management

plans to expand production capacity by 50% with a $15 million investment in plant and machinery. The firm wants to maintain a 35% debt­to­total­

assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 35% of last year’s net income. In 2012, net income

was $5 million. How much external equity must Northern Pacific seek at the beginning of 2013 to expand capacity as desired? Assume the firm uses

only debt and common equity in its capital structure. Write out your answer completely. For example, 25 million should be entered as 25,000,000.

Round your answer to the nearest cent.

Residual dividend model

Welch Company is considering three independent projects, each of which requires a $5 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 = 15%

IRR = 21%

Project M (Medium risk):

Cost of capital = 12%

IRR = 11%

Project L (Low risk):

Cost of capital = 7%

IRR = 9%

Note that the projects’ costs of capital vary because the projects have different levels of risk. The company’s optimal capital structure calls for 55%

debt and 45% common equity, and it expects to have net income of $5,571,000. If Welch establishes its dividends from the residual dividend model,

7.Bowles Sporting Inc. is prepared to report the following 2012 income statement (shown in thousands of dollars).

Sales

$15,200

Operating costs including depreciation

11,400

EBIT

$3,800

EBT

$3,470

Taxes (40%)

Net income

1,388

$2,082

Prior to reporting this income statement, the company wants to determine its annual dividend. The company has 460,000 shares of stock outstanding, and its stock

trades at $50 per share.

The company had a 60% dividend payout ratio in 2011. If Bowles wants to maintain this payout ratio in 2012, what will be its per­share dividend in

2012? Round your answer to the nearest cent.

If the company maintains this 60% payout ratio, what will be the current dividend yield on the company’s stock? Round your answer to two decimal

places.

The company reported net income of $1.9 million in 2011. Assume that the number of shares outstanding has remained constant. What was the

company’s per­share dividend in 2011? Round your answer to the nearest cent.

As an alternative to maintaining the same dividend payout ratio, Bowles is considering maintaining the same per­share dividend in 2012 that it paid in

2011. If it chooses this policy, what will be the company’s dividend payout ratio in 2012? Round your answer to two decimal places

8. Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.6 out of annual earnings per share of $3.5. Currently, Rubenstein Bros.’ stock

is selling for $22.50 per share. Adhering to the company’s target capital structure, the firm has $6 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 20%, which is expected to continue this year

and into the foreseeable future.

Based on that information, what long­run growth rate can the firm be expected to maintain? Round your answer to two decimal places. Do not round

intermediate calculations. (Hint: g = Retention rate x ROE.)

What is the stock’s required return? Round your answer to two decimal places. Do not round intermediate calculations.

If the firm changed its dividend policy and paid an annual dividend of $1.20 per share, financial analysts would predict that the change in policy will

have no effect on the firm’s stock price or ROE. Therefore, what must the firm’s new expected long­run growth rate? Round your answer to two decimal places. Do

not round intermediate calculations.

If this plan is implemented, what must the firm’s required return be? Round your answer to two decimal places. Do not round intermediate calculations.

Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.6 per share to shareholders, but the firm intends to do so in

the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $22.50. In other words, for every $22.50

in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm’s current market capitalization? (Hint:

Remember market capitalization = P0 x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations.

If the plan in Part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole. Do not round

intermediate calculations.

If the plan in Part d is implemented, by how much will the company’s earnings per share be diluted? Round your answer to the nearest cent. Do not round

intermediate calculations.

$ per share

9. In 2011 the Keenan Company paid dividends totaling $3,000,000 on net income of $17 million. Note that 2011 was a normal year and for the past 10 years,

earnings have grown at a constant rate of 4%. However, in 2012, earnings are expected to jump to $27.2 million and the firm expects to have profitable investment

opportunities of $13.6 million. It is predicted that Keenan will not be able to maintain the 2012 level of earnings growth because the high 2012 earnings level is

attributable to an exceptionally profitable new product line introduced that year. After 2012, the company will return to its previous 4% growth rate. Keenan’s target

capital structure is 40% debt and 60% equity.

Calculate Keenan’s total dividends for 2012 assuming that it follows each of the following policies: (Write out your answers completely. For example, 25

million should be entered as 25,000,000.)

Its 2012 dividend payment is set to force dividends to grow at the long­run growth rate in earnings. Round your answer to the nearest

cent.

It continues the 2011 dividend payout ratio. Round your answer to the nearest cent.

It uses a pure residual dividend policy (40% of the $13.6 million investment is financed with debt and 60% with common equity). Round

It employs a regular­dividend­plus­extras policy, with the regular dividend being based on the long­run growth rate and the extra dividend

being set according to the residual policy. Round your answer to the nearest cent.

Extra dividend

Assume that investors expect Keenan to pay total dividends of $6,000,000 in 2012 and to have the dividend grow at 4% after 2012. The stock’s total

market value is $160 million. What is the company’s cost of equity? Round your answer to two decimal places.

What is Keenan’s long­run average return on equity? [Hint: g = Retention rate x ROE = (1.0 ­ Payout rate)(ROE).] Round your answer to two decimal