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

CHAPTER 16 .docx - CHAPTER 16 PROBLEM 1 RESIDUAL DIVIDEND...

This preview shows page 1 - 3 out of 4 pages.

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
Image of page 1
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.
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 4 pages?

  • Fall '16
  • Dr. Bany

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors