The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will require an investment of $175,000 next year. Currently, the share of Giant machinery is $25/share. Required: a) How much dividend Giant Machinery can pay its shareholders this year and what is the dividend payout ratio of the company? Assume the Residual Dividend Payout Policy applies. b) If the company is paying a dividend of $2.50/share and tomorrow the stock will go ex-dividend. Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%. c) Little Equipment for Hire is a subsidiary in the Giant Machinery and currently under the liquidation plan due to the severe contraction of operation due to coronavirus. The company plans to pay a total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend. The required rate of return for shareholders is 12%. Calculate the current value of the firm’s equity in total and per share if the firm has 1.5 million shares outstanding
The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in
the current year is $250,000. The company is planning to launch a project that will require an
investment of $175,000 next year. Currently, the share of Giant machinery is $25/share.
Required:
a) How much dividend Giant Machinery can pay its shareholders this year and what is the dividend
payout ratio of the company? Assume the Residual Dividend Payout Policy applies.
b) If the company is paying a dividend of $2.50/share and tomorrow the stock will go ex-dividend.
Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%.
c) Little Equipment for Hire is a subsidiary in the Giant Machinery and currently under the liquidation
plan due to the severe contraction of operation due to coronavirus. The company plans to pay
a total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend.
The required
in total and per share if the firm has 1.5 million shares outstanding.
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