5. JLC Limited, a manufacturing firm with changing investment opportunities, is considering a major change in dividend policy. It currently has 50 million shares outstanding and pays an annual dividend of $2 per share. The firm current and projected income statement are provided below (in millions):

Current Projected Next Year

EBITDA 1200 1350

Depreciation 200 250

EBIT 1000 1100

Interest Expense 200 200

EBT 800 900

Taxes 320 360

Net Income 480 540

The firm's current capital expenditure is $ 500 million. It is considering five projects for the next year:

Project Investment Beta IRR (using cashflows to equity)

A $190 million 0.6 12.0%

B $200 million 0.8 12.0%

C $200 million 1.0 14.5%

D $200 million 1.2 15.0%

E $100 million 1.5 20.0%

The firm's current beta is 1.0, and the current Treasury Bond rate is 8.5%. The firm expects working capital to increase $50 million both this year and next. The firm plans to finance its net capital expenditures and working capital needs with 30% debt.

a. What is the firm's current payout ratio?

b. What proportion of its current free cash flow to equity is it paying out as dividends?

c. What would your projected capital expenditure be for next year (i.e. Which of the five projects would you accept and why)?

d. How much cash will the company have available to pay out as dividends next year? i.e. What is the maximum amount the company can pay out as dividends?

e. Would you pay out this maximum amount as dividends? Why or why not? What other considerations would you bring to this decision?

f. JLC Limited currently has a cash balance of $100 million (after paying the current year's dividends). If it pays out $125 million as dividends next year, what will its projected cash balance be at the end of the next year? (18 marks)