Question

Air France Company has a target capital structure that consists of 40% debt, and 60% equity, the company is considering a project (capital budget) that costs $12,000,000 to launch five new Boeing Airplanes.

Also the company has the following information:
Net income $8,800,000
Total sales $36,825,000
Earnings Per Share $4.4
Price per share $68

1- The equity needed for the capital budget is: *

$4,800,000

$7,200,000

$5,280,000

$3,520,000

None of the above

2- If the company needs to expand its project, then the dividend payout ratio is: *

60%

50%

40%

18.18%

None of the above

3- The company is intending to expand its project that costs $12,000,000; while paying dividend payout ratio of 40%, then the amount of external equity needed is: *

$1,920,000

$3,520,000

$4,800,000

$19,520,000

None of the above

4- If company decides to pay out dividends for 40%; then the maximum capital that it can use for expanding its project is: *

$3,520,000

$8,480,000

$5,280,000

$8,800,000

None of the above

5- If the company decides to pay out dividends for 30%; and then makes a split 2-for-1 then the dividend per share after split is: *

$0.15

$0.66

$1.32

$2

None of the above

6- If the company decides to pay out dividends for 30%; and then makes a split 5-for-3 then the earnings per share (EPS) after split is: *

$0.5

$1.67

$2.64

$7.33

None of the above

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Answer 1

Ans. 1: Since the target Capital Structure consists of 40% Debt and 60% Equity, the Equity needed for a project that costs $12,000,000 will be $12,000,000 * 0.60 = $7,200,000.

Ans. 2: Net Profit = $8,800,000, Equity required for the project = $7,200,000

                The balance amount of Net profit after allocating $7,200,000 for new project =

$8,800,000- $7,200,000 = $1,600,000

Dividend Pay out Ratio = $1,600,000/ $7,200,000 = 18.18%

Ans. 3: Since, the company wants dividend payout ratio of 40%,

                The balance amount of 60% that could be used as equity to fund the project

= $8,800,000 * 60% = $5,280,000

Equity required for the project = $7,200,000

So, the amount of external equity needed = $7,200,000 - $5,280,000 = $1,920,000

Ans. 4: If the company decides to payout dividend for 40%,

The balance amount of 60% will be the maximum capital that it can use for expanding its project = $8,800,000 * 60% = $5,280,000

Ans. 5: If the company decides to pay out dividends for 30%; and then makes a split 2-for-1   then the dividend per share after split is:

EPS = $4.4

30% Dividend = $4.4 * 30% = $1.32

After split 2-for-1, the dividend per share after split = $1.32/2 = $0.66

Ans. 6: If the company decides to pay out dividends for 30%; and then makes a split 5-for-3 then the earnings per share (EPS) after split = 4.4 * 3 / 5 = $2.64