Suppose that ABC Corp. subscribes to a strict residual dividend policy. Their target debt/equity ratio is...

Suppose that ABC Corp. subscribes to a strict residual dividend policy. Their target debt/equity ratio is 1. Suppose they are willing to issue up to $3 million in new equity (by issuing stock). Their net income for the period is $5 million.

a) What is the maximum capital expenditure that ABC Corp. can afford, while adhering to their target capital structure and dividend policy? $

b) What would be the amount of the dividend if they spent the maximum budget calculated in part a) above? $

Expert Solution

jeff jeffy answered 2 years ago

The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio...

The company currently has a target debt–equity ratio of .45, but the industry target debt–equity ratio is .40. The industry average beta is 1.20. The market risk premium is 8 percent, and the risk-free rate is 6 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 40 percent. The project requires an initial outlay of $680,000 and is expected to result in a $100,000 cash inflow at the end of...

Crawford Inc. uses a residual dividend policy. A debt/equity of 1.0 is considered optimal. Earnings for...

Crawford Inc. uses a residual dividend policy. A debt/equity of 1.0 is considered optimal. Earnings for the period just ended were $1,400, and a total dividend of $420 was declared. (a) How much new debt was taken? What was the total capital expenditure for investment? (b) Suppose the company has 5,000 shares outstanding. The average tax rate on dividend is 15% and the tax rate on capital gain is 30%. What do you expect the company’s share price will drop...

XXY Corp.’s has a target debt-to-equity ratio of 0.30, an equity beta of 1.10, has a...

XXY Corp.’s has a target debt-to-equity ratio of 0.30, an equity beta of 1.10, has a marginal tax rate of 21%, and its debtholders require a return of 6%. Assuming that the current risk-free rate of interest is 2% and the expected return on the market portfolio is 12%, What is XXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Genie Corp is an online commerce company with a target debt-equity ratio of 1. Genie’s current...

Genie Corp is an online commerce company with a target debt-equity ratio of 1. Genie’s current capital structure matches its target leverage, and its equity beta is 0.9. Genie has three divisions: Its main e-commerce division (50% of Genie’s total asset value), a banking division (35% of total asset value), and a logistics division (15% of total asset value). Genie aims to apply the same firm-level target debt-equity ratio across all of its divisions, and believes it will be able...

Acme Corp has a target debt/equity ratio of 0.35. It was $350 million in bonds outstanding...

Acme Corp has a target debt/equity ratio of 0.35. It was $350 million in bonds outstanding with a yield of 7% and 50 million shares of stock outstanding with a current market price of $20 per share. The company’s beta is 1.32 and the risk-free rate of interest is 4% with a market risk premium of 6%. The firm has a tax rate of 25%. The company is looking to raise $250 million to build a second factory. The new...

What are some drawbacks to following a strict residual dividend policy? What do firms typically do...

What are some drawbacks to following a strict residual dividend policy? What do firms typically do in practice? Please explain thoroughly.

1. Define target payout ratio and optimal dividend policy?

The Rockettech Corp. is currently at its target debt ratio of 40%. It is contemplating a...

The Rockettech Corp. is currently at its target debt ratio of 40%. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash inflow of $130,000 a year in perpetuity. The company is uncertain whether to undertake this expansion and how to finance it. The two options are a $1 million issue of common stock or a $1 million issue of 20-year debt. The flotation costs of a stock issue would be...

WRX Corp. has an equity beta of 1.20, a market value debt-to-equity ratio of 0.50, debt...

WRX Corp. has an equity beta of 1.20, a market value debt-to-equity ratio of 0.50, debt that is rated AAA, and a tax rate of 21%. Compute WRX Corp’s weighed average cost of capital (WACC) assuming that the current risk-free rate is 5%, the expected return on the market portfolio is 12%, and the current market price of 7.5% AAA bonds, with par values of $1000 maturing in 12 years is $1200. Assume that the bond makes annual coupon payments....

Fiat Inc. has a target debt-equity ratio of 0.52. The cost of floating equity is 4.75...

Fiat Inc. has a target debt-equity ratio of 0.52. The cost of floating equity is 4.75 percent and the flotation cost of debt is 3.3 percent. The firm’s tax rate is 24 percent. What should the firm use as their weighted average flotation cost? A. 4.25% B. 4.05% C. 4.00% D. 3.50%

Question