Up until now, ABC Limited did not pay any dividends to its shareholders; however, the company feels that it should start paying dividends as it is entering a mature stage. The company would like to determine the amount of dividends to be paid to its shareholders at the end of year 2020. To avoid unnecessary volatilities in dividend payments, ABC Limited intends to adopt the residual dividend approach. It is expected that, starting year 2020, the company will experience a constant growth rate of 5% per year, in perpetuity. The pre-tax cost of debt is 3%, while the cost of equity is 10%. a. Calculate the amount of dividend on a per-share basis that can be paid by ABC Limited at the end of year 2020, assuming that the company has a planned capital expenditure in the amount of $2,000,000 for year 2020. Show your work. b. Based on your answer in part a. will ABC Limited have to get additional borrowing for year 2020? If so, how much? Show your work. c. Based on your answer in part a, calculate the intrinsic value of ABC Limited as of December 31, 2019. Show your work. d. Calculate the amount of planned capital expenditure for year 2020, such that ABC Limited will not be able to pay dividends but will not have to raise any additional equity at the same time. Show your work. Up until now, ABC Limited did not pay any dividends to its shareholders; however, the company feels that it should start paying dividends as it is entering a mature stage. The company would like to determine the amount of dividends to be paid to its shareholders at the end of year 2020. To avoid unnecessary volatilities in dividend payments, ABC Limited intends to adopt the residual dividend approach. It is expected that, starting year 2020, the company will experience a constant growth rate of 5% per year, in perpetuity. The pre-tax cost of debt is 3%, while the cost of equity is 10%. a. Calculate the amount of dividend on a per-share basis that can be paid by ABC Limited at the end of year 2020, assuming that the company has a planned capital expenditure in the amount of $2,000,000 for year 2020. Show your work. b. Based on your answer in part a. will ABC Limited have to get additional borrowing for year 2020? If so, how much? Show your work. c. Based on your answer in part a, calculate the intrinsic value of ABC Limited as of December 31, 2019. Show your work. d. Calculate the amount of planned capital expenditure for year 2020, such that ABC Limited will not be able to pay dividends but will not have to raise any additional equity at the same time. Show your work
