2 Jackson-Presley, in the latest year, had a dividend payout ratio of 25%. The firm has asked you for some advice on whether it should maintain this payout ratio. The income statements for the current year and the current balance sheet are reproduced below - Current Year Revenues $150 million - Cost of Goods Sold $ 60 million - Depreciation & Amortization $ 13 million Earnings before interest and taxes $ 85 million Interest Expenses $ 5 million Taxable income $ 80 million Taxes $ 32 million Net Income $ 48 million The company's last balance sheet also provides an indication of the company's health - Assets Liabilities Property, Plant & Equipment $ 100 million Current Liabilties $20 million Land and Buildings $ 50 million $ 60 million Current Assets $ 50 million Equity $120 million Total $ 200 million Total $ 200 million Debt Practice finals Name: The equity is trading in the market at two times the book value. The debt is composed of ten-year bonds, and is rated A (Typical A rated bonds are yielding 10% currently in the market). Assume that Jackson-Presley intends to maintain its working capital at the same percentage of revenues for the next year, as it has this year. Also assume that the following is the listing of the major investment opportunities that Jackson-Presley has for the next year. Project Total Investment IRR on project Beta (Levered) (using CF to Equity) A $ 15 million 16% 1.60 B $ 30 million 15% 1.25 $ 25 million 12.5% 1.0 D $ 20 million 11.5% 0.5 a. If revenues, net income and depreciation are all expected to grow 20% next year, and the firm maintains its existing debt financing mix (in market value terms), how much can the firm afford to pay out as dividends after meeting working capital and capital budgeting needs? (5 points) b. The company's current cash balance is $10 million. What will happen to this cash balance if Jackson-Presley maintains its payout ratio at 25% next year? (1 point)