Question

Banyan Co.’s common stock currently sells for $46.25 per share. The growth rate is a constant 8%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is 20%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your answer to two decimal places.

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Banyan Co. has a target capital structure of 65% common equity and 35% debt to fund its $9 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt of 12%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D₁) is $3, and the current stock price is $26.

1. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.)

   Growth rate = (1 - Payout ratio)ROE

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Answer 1

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