Peterson & Peterson Company plans to undertake a massive capital expansion project next year that will require $10 million investment. The companys target capital structure consists of 60% debt and 40% equity. Peterson has 1million shares of stock outstanding. If net income next year is

$6 million and the company follows a residual distribution policy with all distributions as dividends, determine the following:

1. the companys dividend per share for next year

2. the companys forecasted dividend payout ratio

3. the amount of equity financing and long-term debt needed to finance the project

4. What are the advantages and disadvantages of the companys residual policy? (Hint: do not neglect signaling and clientele effects.)

5. Peterson Company plans to repurchase some of its own outstanding stock in the future if it sees that its stock price is undervalued in the market and more specially to reorganize its capital structure. Identify three advantages and three disadvantages of stock repurchases.