IHOP is a family restaurant chain and it is re-examining its policy of paying minimal dividends to its shareholders. In 2005 they reported a net income of $66 million and capital expenditures of $150 million. Depreciation was $50 million and working capital was $43 million while sales amounted to $783 million. They project the following over the next 5 years:

Capital expenditures will grow at 10% per year and depreciation will grow at 15 percent per year.

Working capital as a percentage of revenues will stay at the same levels as in 2005 and revenues are growing at 10 percent a year.

The company has no debt and does not plan to use any debt over the next 5 years.

a) Estimate how much cash IHOP has over the next five years to pay out to its shareholders over the next 5 years.

b) What happens if the firm plans to change its capital structure by borrowing 25% of its net capital expenditures and working capital needs?

c) Assuming you are the CEO and decide to continue not to pay dividends. A group of dissident shareholders are asking why you are not paying out your free cash-flow to equity to the shareholders. How would your defend your decision? How receptive would the shareholders be to your explanation? Does it make a difference if IHOP has earned a ROE of 25% over the last 5 years and its beta is 1.2?