# FI516_WEEK_1_HOMEWORK_ANSWER_KEY - FI516 WEEK 1 HOMEWORK...

This preview shows pages 1–2. Sign up to view the full content.

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)(2011 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. 4. The regular dividends would be 10% above the 2010 dividends: 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 financing of that budget, and it would give correct signals to investors. c. No. As a regular dividend it should be lower than \$9 Million.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 4

FI516_WEEK_1_HOMEWORK_ANSWER_KEY - FI516 WEEK 1 HOMEWORK...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online