Question
ABC Corporation, with changing investment opportunity has considered a major change in dividend policy. The current market price of its share is $100 each. It
ABC Corporation, with changing investment opportunity has considered a major change in dividend policy. The current market price of its share is $100 each. It currently has 50 million shares outstanding and pays an annual dividend of $2 per share. The rate of capitalization, appropriate to the risk class to which the company belongs, is 12%. The market risk premium is 5.25%. The firm current and projected income statement are provided below (in millions):
SI No |
| 2020-21 | Projected for 2021-22 |
1 | EBITDA | 1300 | 1350 |
2 | Depreciation | 300 | 250 |
3 | EBIT | 1000 | 1100 |
4 | Interest Expense | 200 | 200 |
5 | EBT | 800 | 900 |
6 | Taxes | 320 | 360 |
7 | Net income | 480 | 540 |
The firm's current capital expenditure is $ 500 million. It is considering five projects for the next year i.e., 2021-2022:
Project | Investment ($mil) | Beta | IRR |
A | 190 | 0.6 | 12.00% |
B | 200 | 0.8 | 12.00% |
C | 200 | 1.0 | 14.50% |
D | 200 | 1.2 | 15.00% |
E | 100 | 1.5 | 20.00% |
The firm's current beta is 1.0, and the current T. Bond rate is 8.5% and the market risk premium is 5.25%. 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. Answer all of the following.
- Compute the firm's current payout ratio?
- What proportion of its current free cash flow to equity (FCFE) is it paying out as dividends? Free cash flows to equity next year=net income-(capex-depreciation) (1-Debt)-Change in WC(1-Debt)
- Based on MM approach, calculate the market price of the share of the company when
- The recommended dividend is declared
- The recommended dividend is not declared
- How many new shares are to be issued by the company at the end of the accounting year on the assumption that the net income for the year as mentioned and investment budget is $500 million, when:
- The above dividends are distributed and
- The dividends are not declared.
- What would your projected capital expenditure be for next year i.e., 2021-22?
- How many new shares must the company issue if the dividend is paid and company needs the required money for the approved investment expenditure during the year?
- How much cash will the company have available to pay out as dividends next year? (Every Calculation must be done without the use of excel)
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