Atlantic Steel Company (ASC) was formed 6 years ago to exploit a new continuous casting process. ASC's founders, Roger Proctor and Nancy Pinto, had been employed in the research department of a major integrated-steel company, but when that company decided against using the new process (which Proctor and Pinto had developed), they decided to strike out on their own. One advantage of the new process was that it required relatively little capital in comparison with the typical steel company, so Proctor and Pinto have been able to avoid issuing new stock and thus own all of the shares. However, ASC has now reached the stage at which outside equity capital is necessary if the firm is to achieve its growth targets. Therefore, Proctor and Pinto have decided to take the company public. Until now, Proctor and Pinto have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so dividend policy has not been an issue. However, before talking with potential outside investors, they must decide on a dividend policy. Assume you were recently hired by Forb Roth Company (FRC), a national consulting firm that has been asked to help ASC prepare for its public offering. Monica Cassey, the senior FRC consultant in your group has asked you to make a presentation to Proctor and Pinto in which you review the theory of dividend policy and discuss the following issues. A. (1) Assume that ASC has completed its IPO and has a $120 million capital budget planned for the coming year. You have determined that its present capital structu debt) is optimal, and its net income is forecasted at $150 million. Use the residual distribution approach to determine ASC's total dollar distribution. Assume for now that the distribution is in the form of a dividend. Suppose ASC has 100 million shares of stock outstanding. What is the forecasted dividend payout ratio? What is the forecasted dividend per share? What would happen to the payout ratio and DPS if net income were forecasted to decrease to $96 million? To increase to $170 million? (2) In general terms, how would a change in investment opportunities affect the payout ratio under the residual distribution policy? (3) What are the advantages and disadvantages of the residual policy? B. What is a stock repurchase? Discuss the advantages and disadvantages of a firm repurchasing its own shares. C. As mentioned previously, ASC has 100 million shares of stock outstanding. Suppose market price is $20 per share. The firm has $250 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the ASC value of operations, and how many shares will remain after the repurchase? (Note: Value of Operations + Value of Short term Investment = Value of Equity + Value of Debt) D. What are stock splits and stock dividends? What are the advantages and disadvantages of each