2. A non-leveraged company has 5.5 million shares outstanding, and each share is selling at $17.5. The company has a constant return-on-equity of 25% per annum, and adopts a constant payout ratio of 65%. Investors demand a return of 18% per annum on their stock investment. (a) Based on the dividend discount model and assuming that dividends are payable at the end of each year, calculate: i. the dividend expected at the end of the current year. ii. the total value of equity (or capital) of the company. [Hint: This value is not the market capitalization of the company.] [4 marks) (b) Suppose the company lowers its constant payout ratio to 55%. Calculate: i. the present value of growth opportunities (per share) compared to the original payout ratio. ii. the new P/E ratio. [4 marks] At the end of the year, the company's balance sheet appears as follows: Equity $57 million Free cash Other assets $7 million $50 million The free cash balance does not earn any return. The company plans to use $4 million of the cash to repurchase shares at the market price of $20 at that time. The remaining free cash is then used to pay dividends to the shareholders. (c) Calculate the number of outstanding shares and the market price of the company's shares after these payout operations (dividend payment and repurchase). [3 marks] (d) Explain how the P/E ratio and the earnings-per-share will change in the future, compared to the case if there were no payout operations. [3 marks) (e) In addition to the payout operations described above, the company will also raise funds amounting to $16 million by issuing corporate bonds. If these bonds are expected to yield 8% return per annum to their investors, calculate the new equity cost of capital assuming that the Modigliani-Miller propositions hold and that there is no tax. Use market values in your calculations. [4 marks) [Total: 18 marks]