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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.

  1. Compute the firm's current payout ratio?
  2. 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)
  3. Based on MM approach, calculate the market price of the share of the company when
    1. The recommended dividend is declared
    2. The recommended dividend is not declared
  4. 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:
    1. The above dividends are distributed and
    2. The dividends are not declared.
  5. What would your projected capital expenditure be for next year i.e., 2021-22?
  6. 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?
  7. 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)

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