answers-odd-problems-ch18 - Chapter 18 Distributions to...

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Distributions to Shareholders: Dividends and Repurchases SOLUTIONS TO END-OF-CHAPTER PROBLEMS 18-1 70% Debt; 30% Equity; Capital Budget = \$3,000,000; NI = \$2,000,000; PO = ? Equity retained = 0.3(\$3,000,000) = \$900,000. NI \$2,000,000 -Additions 900,000 Earnings Remaining \$1,100,000 Payout = 000 , 000 , 2 \$ 000 , 100 , 1 \$ = 55%. 18-3 Retained earnings = Net income (1 - Payout ratio) = \$5,000,000(0.55) = \$2,750,000. External equity needed: Total equity required = (New investment)(1 - Debt ratio) = \$10,000,000(0.60) = \$6,000,000. New external equity needed = \$6,000,000 - \$2,750,000 = \$3,250,000. 18-5 Equity financing = \$12,000,000(0.60) = \$7,200,000. Dividends = Net income - Equity financing = \$15,000,000 - \$7,200,000 = \$7,800,000. Dividend payout ratio = Dividends/Net income = \$7,800,000/\$15,000,000 = 52%. 18-7 Capital budget should be \$10 million. We know that 50% of the \$10 million should be equity. Therefore, the company should pay dividends of: Dividends = Net income - needed equity = \$7,287,500 - \$5,000,000 = \$2,287,500. Mini Case:

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answers-odd-problems-ch18 - Chapter 18 Distributions to...

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