FI516_WEEK_1_HOMEWORK_ANSWER_KEY - FI516 WEEK 1 HOMEWORK...

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FI516 – WEEK 1 – HOMEWORK ANSWER KEY Problem 14-10 14-10 a. 1. 2011 Dividends = (1.10)(2010 Dividends) = (1.10)($3,600,000) = $3,960,000 2. 2010 Payout = $3,600,000/$10,800,000 = 0.33 = 33% 2011 Dividends = (0.33)(2009 Net income) = (0.33)($14,400,000) = $4,800,000 ( Note : If the payout ratio is rounded off to 33%, 2011 dividends are then calculated as $4,752,000.) 3. Equity financing = $8,400,000(0.60) = $5,040,000 2011 Dividends = Net income - Equity financing = $14,400,000 - $5,040,000 = $9,360,000 All of the equity financing is done with retained earnings as long as they are available.
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Regular dividends = (1.10)($3,600,000) = $3,960,000. The residual policy calls for dividends of $9,360,000. Therefore, the extra dividend, which would be stated as such, would be: Extra dividend = $9,360,000 - $3,960,000 = $5,400,000. An even better use of the surplus funds might be a stock repurchase. b. Policy 4, based on the regular dividend with an extra, seems most logical. Implemented properly, it would lead to the correct capital budget and the correct
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FI516_WEEK_1_HOMEWORK_ANSWER_KEY - FI516 WEEK 1 HOMEWORK...

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