Question

Q. 3: Kendra Enterprises has never paid a dividend. Free cash flows are projected to be $80,000, $100,000 and $120,000 for the next 3 years, respectively; after the third year, FCF is expected to grow at a constant rate allowing Kendra pay a dividend of 65% and earn 20% on equity (ROE = 20%). If the company’s weighted average cost of capital is 12%, calculate;

1. The terminal, or horizon, value of operations.
2. The value of Kendra’s operations.   

Q. 4: Explain the concept of “dividend irrelevance”. Prove from an example that dividend payment and non-payment have same affects on the shareholder’s wealth? (Example should not be taken from any book or internet).                                                              

Q. 5: Residual distribution model should not be followed in some circumstances. When this model should not strictly be followed and when it should be followed? How this model can be helpful in lowering the WAAC?                                                                 

Q. 6: When stocks repurchase is preferred over dividend payment and what benefits are achieved while repurchasing stock?                                                                                                                                                                           

Q. 7: What effects does leasing have on a firm’s balance sheet and capital structure? Explain these effects with your own created example.                                                                                                                                                              

Q.8: Explain how net operating working capital is recovered at the end of a project’s life and why it is included in a capital budgeting analysis?

Answer 1

Q3 -

Formulas

G = ROE* (1- dividend payout ratio)

G = 20% * (1-0.65)

G = 0.07

Discount rate or WACC = 0.12

Terminal value = FCF₃* (1+g)/(r-g)

Calcaulation:

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