Chapter 18: Problems A10 & B2 (p. 542)
(Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm's chief financial officer would like the firm to distribute
25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00
-2-er share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), calculate projected dividends per share for this year and the next four.
B2. (Dividend policy) A firm has 20 million common shares outstanding. It currency pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in millions.
a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.
1 2 3 4 5 Thereafter
Earnings 100 125 150 120 140 150+ per year
Discretionary cash flow 50 70 60 20 15 50+ per year
Chapter 20: Problem A2 (p. 603)
(Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)?
Chapter 21: Problem B6
(Net Advantage to Leasing) Empire Excavation Corporation plans to acquire a fleet of 10 dump trucks. Each truck cost $75,000. Empire can borrow $750,000 on a secured basis at a pretax cost of 14%. The dump trucks can be depreciated for tax purposes on a straightline basis to zero over a five-year useful life. Truck Leasing Corporation has offered to lease the fleet of trucks to Empire under a five-year lease that calls for lease payments of $190,000 at the end of each year. Empire estimates that forgone residual value would be $10,000 per truck (net of taxes). Empire tax rate is 34%. It's cost of capital is 16%.
a. Calculate the stream of net cash flows to Empire under the lease financing.
b. Calculate the net advantage of leasing.