Residual Distribution Model

Kendra Brown is analyzing the capital requirements for Reynold Corporation for next year. Kendra forecasts that Reynold will need $$12$ million to

fund all of its positive$-$NPV projects and her job is to determine how to raise the money. Reynold's net income is $$9$ million, and it has paid a $$2$

dividend per share $($DPS$)$ for the past several years $(1$ million shares of common stock are outstanding$)$; its shareholders expect the dividend to

remain constant for the next several years. The company's target capital structure is $35\%$ debt and $65\%$ equity.

a$.$ Suppose Reynold follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital

budget? Enter your answer in dollars. For example, an answer of $$2$ million should be entered as $2,000,000,$ not $2.$ Round your answer to the

nearest dollar.

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b$.$ If Reynold follows the residual model with all distributions in the form of dividends, what will be its dividend per share? Round your answer to the

nearest cent.

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What will be its payout ratio for the upcoming year? Round your answer to two decimal places.

$\%$

c$.$ If Reynold maintains its current $$2$ DPS for next year, how much retained earnings will be available for the firm's capital budget? Enter your

answer in dollars. For example, an answer of $$2$ million should be entered as $2,000,000,$ not $2.$ Round your answer to the nearest dollar.

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d$.$ Can Reynold maintain its current capital structure, maintain its current dividend per share, and maintain a $$12$ million capital budget without

having to raise new common stock?

e$.$ Suppose management is firmly opposed to cutting the dividend; that is$,$ it wishes to maintain the $$2$ dividend for the next year. Suppose also

that the company is committed to funding all profitable projects and is willing to issue more debt $($along with the available retained earnings$)$ to

help finance the company's capital budget. Assume the resulting change in capital structure has a minimal impact on the company's composite

cost of capital, so that the capital budget remains at $$12$ million. What portion of this year's capital budget would have to be financed with debt?

Round your answer to two decimal places.