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EFM-15problem

# EFM-15problem - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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15problem 3/22/2010 7:08 12/14/2005 Chapter 15. Solution to End-of-Chapter Comprehensive/Spreadsheet Problem Problem 15-10 Buena Terra 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 percent equity and 40 percent debt; it has 1,000,000 shares of common equity outstanding; and its net income is \$8 million. The company forecasts that it will require \$10 million to fund all of its profitable (that is, positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? Input Data DPS \$3.00 Target equity ratio 60% Target debt ratio 40% Shares outstanding 1,000,000 Net Income \$8,000,000 Total capital budget \$10,000,000 Required retained earnings = Total capital budget x Target equity ratio Required retained earnings = \$10,000,000 x 60% Required retained earnings = \$6,000,000 b. If Buena Terra follows the residual dividend model, what will be the company's dividend per share and payout ratio for the upcoming year? Dividend per share = (Net Income Required RE) / Shares outstanding Dividend per share = \$8,000,000 \$6,000,000 / 1,000,000 Dividend per share = \$2.00 So, following the residual policy would require a dividend cut.

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EFM-15problem - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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