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    Jawabab MK Wayan

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    Erica Lesmana
    The document contains 3 questions and solutions related to corporate finance concepts: 1. Calculates the prior year's dividend per share of $3.44 based on a 9% increase to the current $0.75 dividend after a 5-for-1 stock split. 2. Determines the external equity financing needed of $3.25 million for a firm expanding production capacity by 40% based on its capital structure and dividend payout ratios. 3. Evaluates 3 investment projects for a firm and calculates its 31.39% dividend payout ratio if it adopts the residual dividend model and funds the 2 projects with the highest IRRs above their costs of capital.

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    Jawabab MK Wayan

    Uploaded by

    Erica Lesmana
    177 views1 page
    The document contains 3 questions and solutions related to corporate finance concepts: 1. Calculates the prior year's dividend per share of $3.44 based on a 9% increase to the current $0.75 dividend after a 5-for-1 stock split. 2. Determines the external equity financing needed of $3.25 million for a firm expanding production capacity by 40% based on its capital structure and dividend payout ratios. 3. Evaluates 3 investment projects for a firm and calculates its 31.39% dividend payout ratio if it adopts the residual dividend model and funds the 2 projects with the highest IRRs above their costs of capital.

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    The document contains 3 questions and solutions related to corporate finance concepts: 1. Calculates the prior year's dividend per share of $3.44 based on a 9% increase to the current $0.75 dividend after a 5-for-1 stock split. 2. Determines the external equity financing needed of $3.25 million for a firm expanding production capacity by 40% based on its capital structure and dividend payout ratios. 3. Evaluates 3 investment projects for a firm and calculates its 31.39% dividend payout ratio if it adopts the residual dividend model and funds the 2 projects with the highest IRRs above their costs of capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    177 views1 page

    Jawabab MK Wayan

    Uploaded by

    Erica Lesmana
    The document contains 3 questions and solutions related to corporate finance concepts: 1. Calculates the prior year's dividend per share of $3.44 based on a 9% increase to the current $0.75 dividend after a 5-for-1 stock split. 2. Determines the external equity financing needed of $3.25 million for a firm expanding production capacity by 40% based on its capital structure and dividend payout ratios. 3. Evaluates 3 investment projects for a firm and calculates its 31.39% dividend payout ratio if it adopts the residual dividend model and funds the 2 projects with the highest IRRs above their costs of capital.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    ERICA LESMANA (17/414139/EK/21541)

    1. After a 5- for- 1 stock split, Strasburg Company paid a dividend of $ 0.75 per new share, which
    represents a 9% increase over last year’s pre- split dividend. What was last year’s dividend per
    share?

    Since this represents a 9% increase over the prior year, the dividend on the pre-split share is
    $3.75/1.09 = $3.44 per share

    2. External Equity Financing: ​Northern Pacific heating and cooling Inc. has a 6 month backlog of
    orders for its patented solar heating system. To meet this demand, management plans to expand
    production capacity by 40% with a $10 million investment in plant and machinery. The firm wants to
    maintain a 40% debt to total assets ratio in its capital structure. It also wants to maintain its past
    dividend policy of distributing 45% of last years net income. In 2008, net income was $5 million.
    How much external equity must Northern Pacific seek at the beginning of 2009 to expand capacity as
    desired? Assume that the firm uses only debt and common equity in its capital structure.

    Retained earnings = Net income (1 – Payout ratio)


    = $5,000,000(0.55) = $2,750,000.

    External equity needed:


    Total equity required = (New investment)(1 – Debt ratio)
    = $10,000,000(0.60) = $6,000,000.

    New external equity needed = $6,000,000 – $2,750,000 = $3,250,000.

    3. SunnyWay Company is considering three independent projects and each of them requires $5
    million investment:
    Project H (high risk) Cost of capital = 16% IRR = 20%
    Project M (medium risk) Cost of capital = 12% IRR = 10%
    Project L (low risk) Cost of capital = 8% IRR = 9%
    The optimal capital structure is 50% debt and 50% equity. The expected net income (NI) is
    $7,287,500. If the firm adopts the residual dividend model, what will be the firm’s dividend payout
    ratio?

    The firm should choose P ​ rojects H and L ​since​ IRR > cost of capital​ for both H and L, which means
    that the firm needs to raise $10 million
    According to the optimal capital structure:
    $10 million*(0.5) = $5 million will be raised from debt
    $10 million*(0.5) = $5 million will be raised from equity (retained from NI)

    Dividends = NI - R/E = 7,287,500 - 5,000,000 = $2,287,500


    Payout ratio = Dividends / NI = 2,287,500 / 7,287,500 = 31.39%

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