Problem 18-19The MoMi Corporation's cash flow from operations before interest and taxes was $4.2 million in the year just ended, and it expectsthat this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 15% of pretax cash floweach year. The tax rate is 35%. Depreciation was $310,000 in the year just ended and is expected to grow at the same rate as theoperating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 10% per year, and the firm currentlyhas debt of $6.6 million outstanding. Use the free cash flow approach to value the firm's equity. (Round answer to nearest wholenumber. Enter your answer in dollars not in millions.)Value of the equity

Free cash flow is the cash flow which is available with the firm to distribute to the shareholders.…

Answered: The MoMi Corporation's cash flow from…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 20PROB

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RESIDUAL DIVIDEND MODEL Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a 3.00 dividend per share (DPS) for the past several years, and its, shareholders expect the dividend to remain constant for the next several years. The Companys target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net income is 8 million. The company forecasts that it will require 10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the companys dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current 3.00 DPS for next year, how much retained earnings will be available for the firm's capital budget? d. Can the company maintain its current capital structure, the 3.00 DPS, and a 10 million Capital budget without having to raise new common stock? e. Suppose that Buena Terra's management is firmly opposed to cutting the dividend; that is, it wants to maintain the 3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the companys capital budget. Assume that the resulting change in capital structure has a minimal effect on the company's composite cost of capital so that the capital budget remains at 10 million. What portion of this year's capital budget would have to be financed with debt? f. Suppose once again that Buena Terras management wants to maintain the 3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its 10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terra's management wants to maintain the 3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the company's projects are divisible, what will be the company's capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?
RESIDUAL DIVIDEND MODEL Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a 3.00 dividend per share (DPS) for the past several years, and its shareholders expeet the dividend to remain constant for the next several years. The companys target capital structure is 60% equity and 40% debt, it has 1,000,000 shares of common equity outstanding, and its net Income is 8 million. The company forecasts that it will require 10 million to fund all of its profitable (i.e., positive NPV) projects for the upcoming year. a. If Buena Terra follows the residual dividend model, how much retained earnings will it need to fund its capital budget? b. If Buena Terra follows the residual dividend model, what will be the companys dividend per share and payout ratio for the upcoming year? c. If Buena Terra maintains its current 3.00 DPS for next year, how much retained earnings will be available for the firms capital budget? d. Can the company maintain its current capital structure, the 3.00 DPS, and a 10 million capital budget without having to raise new common stock? e. Suppose that Buena Terras management is firmly opposed to cutting the dividend; that is, it wants to maintain the 3.00 dividend for the next year. Also, assume that the company was committed to funding all profitable projects and was willing to issue more debt (along with the available retained earnings) to help finance the companys capital budget Assume that the resulting change in capital structure has a minimal effect on the companys composite cost of capital so that the capital budget remains at 10 million. What portion of this years capital budget would have to be financed with debt? f. Suppose once again that Buena Terras management wants to maintain the 3.00 DPS. In addition, the company wants to maintain its target capital structure (60% equity and 40% debt) and its 10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue to meet each of its objectives? g. Now consider the case where Buena Terras management wants to maintain the 3.00 DPS and its target capital structure, but it wants to avoid issuing new common stock. The company is willing to cut its capital budget to meet its other objectives. Assuming that the companys projects are divisible, what will be the companys capital budget for the next year? h. What actions can a firm that follows the residual dividend model take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget?

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