CHAPTER 16 .docx - CHAPTER 16 PROBLEM 1 RESIDUAL DIVIDEND MODEL Aeon Telecommunications has a target capital structure that consists of 70 debt and 30

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CHAPTER 16 PROBLEM 1 RESIDUAL DIVIDEND MODEL Aeon Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be \$3,000,000. If Aeon reports net income of \$3,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? 70% Debt 30% Equity Capital budget = \$3,000,000 NI = \$3,000,000 PO = ? Equity retained = 0.3(\$3,000,000) = \$900,000. NI \$3,000,000 (– )Additions to RE \$ 900,000 Earnings remaining \$2,100,000 Payout = \$ 2,100,000 \$ 3,000,000 = 70% PROBLEM 3 STOCK PURCHASES Beta Industries has a net income of \$2,000,000, and it has \$1,000,000 shares a common stock outstanding. The company’s stock currently trades at \$32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its share in the open market. The repurchase is expected to have no effect on net income or its stock price. What will be Beta’s EPS following the stock repurchase? NI = \$2,000,000 Shares = 1,000,000 P0 = \$32 Repurchase = 20% New P0 = ? Repurchase = 0.2 1,000,000 = 200,000 shares. Repurchase amount = 200,000 \$32 = \$6,400,000. EPS Old = ¿ Shares = \$ 2,000,000 1,000,000 = \$2.00 P/E = \$ 32 \$ 2.00 = 16X EPS New = \$ 2,000,000 1,000,000 200,000 = \$2.50
Price New = EPS New P/E = \$2.50(16) = \$40 PROBLEM 4 STOCK SPLIT After a five-for-one stock split, Iskandar Company paid a dividend of \$0.90 per new share, which represents a 9% increase over last year’s per-split dividend. What was last year’s dividend per share? DPS after split = \$0.90. Equivalent pre-split dividend = \$0.90(5) = \$4.50.

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