A firm is planning its next year's dividend payout. The firm forecasts net income of $12.6M...

A firm is planning its next year's dividend payout.
The firm forecasts net income of $12.6M next year.
It anticipates a capital budget of $7.3M next year.
It keeps a debt ratio of 35%

a) How much would the company pay in dividends next year if it follows a residual dividend policy?

b) Suppose the firm pays $2.6M in dividends THIS year. In a concise sentence, explain why the company might choose to pay something closer to this number instead, next year.

Expert Solution

a) In residual dividend policy earnings is first attributable towards equity portion of finance required to fund the upcoming projects. Any amount left after such attribution is distributed in the form of dividend.

Anticipated Capital Budget = $7.3M
Debt Ratio = 35%
Equity Ratio = 65%
Capital attributable to Equity = Equity Ratio * Anticipated Capital Budget
                                                          = 65% of 7.3M
                                                          = 4.745M

Dividend = Net Income - Capital attributable to Equity
                = 12.6M – 4.745M
                = 7.855M

b) The company might choose to pay something closer to $2.6M next year because of the concept of stable dividend. The purpose of the stable dividend policy is a predictable dividend payout ratio. With this approach volatility is eliminated which gives more assurance to the shareholder about the amount of dividend to be received. Most of the investors seek certainty and therefore companies opt for a stable dividend policy.

jeff jeffy answered 1 year ago

A firm is planning next year's capital budget. It is at its optimal capital structure, which...

A firm is planning next year's capital budget. It is at its optimal capital structure, which is 32% debit and 68%, common equity, and the company’s earnings in dividends are growing at a constant rate of 4%. The last dividends, D0, was $1.50, and the company’s stock currently sells at a price of $36 per share. The firm can raise debt at a 6% before-tax cost and is projecting net income to be $8,500,000 with a dividend payout ratio of...

Walton, Inc. forecasts earnings next year of $4 per share.Walton, Inc. has a dividend payout...

Walton, Inc. forecasts earnings next year of $4 per share. Walton, Inc. has a dividend payout ratio of 30% and a required return of 15%. Its ROE is 17%. What is the company's PVGO based on the Gordon growth model?options:$17.14$12.04$38.71$-$4.86$-$14.19

A company has just paid its first dividend of $3.94. Next year's dividend is forecast to...

A company has just paid its first dividend of $3.94. Next year's dividend is forecast to grow by 9 percent, followed by another 9 percent growth in year two. From year 3 onwards dividends are expected to grow by 3.2 percent per annum, indefinetely. Investors require a rate of 14 percent p.a for investments of this type. The current price of the share is (round to nearest cent). a.$41.79, b.$38.19, c.$22.13, d.$21.84

A company has just paid its first dividend of $4.01. Next year's dividend is forecast to...

A company has just paid its first dividend of $4.01. Next year's dividend is forecast to grow by 10 percent, followed by another 10 per cent growth in year two. From year three onwards dividends are expected to grow by 3.3 percent per annum, indefinitely. Investors require a rate of return of 18 percent p.a. for investments of this type. The current price of the share is (round to nearest cent)

The Wei Corporation expects next year's net income to be $ 15 million. The firm's debt...

The Wei Corporation expects next year's net income to be $ 15 million. The firm's debt ratio is currently 40%. Wei has $ 12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual model ( assuming all payments are in the form of dividends), how large should Wei's dividend payout ratio be next year?

A firm has declared that its next dividend will be .75. If youexpect the dividend...

A firm has declared that its next dividend will be .75. If you expect the dividend to grow by 4% per year and you require an 11% return, what is the maximum price you will be willing to pay for this stock today? Show your work for partial credit.

A firm has Net Income of $60,800 and has Total Assets of $601,991. The firm’s payout...

A firm has Net Income of $60,800 and has Total Assets of $601,991. The firm’s payout ratio is 60 percent. What is the firm’s Internal Growth rate? Can the firm grow at 4 percent without raising external funds and why? (Hint: Need to first compute ROA). Group of answer choices 6.45 percent; No, because 4 percent < Internal Growth Rate 6.45 percent; Yes, because 4 percent < Internal Growth Rate 4.21 percent; Yes, because 4 percent < Internal Growth Rate...

A company is planning on increasing its annual dividend by 7.50% a year for the next...

A company is planning on increasing its annual dividend by 7.50% a year for the next three years and then settling down to a constant growth rate of 2.50% per year in perpetuity. The company just paid its annual dividend in the amount of $0.80 per share. What is the current stock price if the required rate of return is 17.50%? $6.20 $6.36 $6.51 $6.67 $6.82

A company is planning on increasing its annual dividend by 8.75% a year for the next...

A company is planning on increasing its annual dividend by 8.75% a year for the next three years and then settling down to a constant growth rate of 3.75% per year in perpetuity. The company just paid its annual dividend in the amount of $1.05 per share. What is the current stock price if the required rate of return is 18.75%? Question 8 options: $7.82 $8.02 $8.23 $8.43 $8.64

Computing the Dividend Yield and the Dividend Payout Ratio The income statement, statement of retained earnings,...

Computing the Dividend Yield and the Dividend Payout Ratio The income statement, statement of retained earnings, and balance sheet for Santiago Systems are as follows: Santiago Systems Income Statement For the Year Ended December 31, 20X2 Amount Percent Net sales $5,345,000 100.0% Less: Cost of goods sold (3,474,250) 65.0 Gross margin $1,870,750 35.0 Less: Operating expenses (1,140,300) 21.3 Operating income $730,450 13.7 Less: Interest expense (27,000) 0.5 Income before taxes $703,450 13.2 Less: Income taxes (40%)* (281,380) 5.3 Net income...

Question