FIN-516 WEEK 1 – HOMEWORK ASSIGNMENT
Problem Based on Chapter 14, Residual Dividends
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. Given:
2011 Net Income = $15,000,000
2012 Net Income = increased by 8% = ($15,000,000) + ($15,000,000 * 8%) = $16,200,000 2012 Target Equity Ratio = 65%
2011 Dividend Payout = $3,000,000
2012 Capital Budget = $12,000,000
- If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?
- What is 2012 dividend payout ratio if the company increases its dividends at 8%?
- If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividend payout ratio?
4.How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy?
- What would be the prudent dividend policy for 2012?: Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount.
Problem 19-3 (Chapter 19) on Warrants
This problem is posted on page 781 of the textbook.
(19–3) What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through (a) convertibles and (b) warrants?