Problem Set 2

Show detailed calculations and explanation in order to earn full credit.

Assigned Problem 1

David Rose Inc. forecasts a capital budget of $500,000 next year with forecasted net income of $400,000. The company wants to maintain a target capital structure of 30% debt and 70% equity. If the company follows the residual dividend policy, how much in dividends, if any, will it pay?

Assigned Problem 2

The following data apply to Elizabeth's Electrical Equipment:

All inputs are in millions

Value of operations

$20,000

Short-term investments

$1,000

Debt

$6,000

Number of shares

300

The company plans on distributing $50 million by repurchasing stock. Calculate what the intrinsic stock price per share will be immediately after the repurchase.