answers-odd-problems-ch18

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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