You have been asked to assess the dividend policy of Smith Inc., a consumer product company, and have been

given the last two years of data on the company.

$20132014$

Revenues $$1,000$ $$1,100$

EBITDA $$500$ $$560$

EBIT $$400$ $$440$

Net Income $$150$ $$180$

Total Non$-$cash Working Capital $$60$ $$40$

Cash $$40$ $$80$

Total Debt $$90$ $$120$

The company also had capital expenditures of $$150$ million in $2014$ and made a cash acquisition of

$$50$ million in $2014.$

a$)$ If Smith Inc. bought back $$50$ million of its own stock in $2014,$ estimate the dividend payout ratio for

Smith Inc. in $2014.($Dividend payout $=$ Dividends as a percent of net income, Depreciation $=$ EBITDA $-$

EBIT$).(5$ points$)$

b$)$ Now assume that you are told that net income and revenues are expected to grow $20\%$ in $2015,$ while

capital expenditures and depreciation will grow $10\%.$ In addition, the company plans to make no cash

acquisitions in $2015,$ to maintain non$-$cash working capital at the same percent of revenues as it did in $2014$

and to pay out $25\%$ of its net income as dividends. Estimate how much the company can spend on stock

buybacks in $2015,$ if it wants to increase its cash balance by $$20$ million during the year and retire half of

its total debt