Question
1. Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $8 billion in operating assets. Furthermore, Kahn
1.
Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt of 11%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $20.
- What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations. %
- If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations.
2.
Sidman Products's common stock currently sells for $45 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $2.20, and it finances only with common equity.
- If investors require a 12% return, what is the expected growth rate? Round your answer to two decimal places. Do not round your intermediate calculations. %
- If Sidman reinvests retained earnings in projects whose average return is equal to the stock's expected rate of return, what will be next year's EPS? (Hint: g = (1 Payout ratio)ROE). Round your answer to the nearest cent. Do not round your intermediate calculations. $ per share
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started