This is a more difficult but informative problem. James Brodrick & Sons, Incorporated, is growing rapidly and, if at all possible, would like to finance its growth without selling new equity. Selected information from the company's five-year financial forecast follows. Year Earnings after tax ($ millions) Capital investment ($ millions) Target book value debt-to-equity ratio (%) Dividend payout ratio (%) Marketable securities ($ millions) (Year marketable securities = $220 million) Year Dividends (millions) Divident Payout ratio (%) 1 1 100 170 120 2 ? 220 2 110 300 120 ? 220 a. According to this forecast, what dividends will the company be able to distribute annually without raising new equity and while maintaining a balance of $220 million in marketable securities? What will the annual dividend payout ratio be? (Hint: Remember sources of cash must equal uses at all times.) Note: Round dividends to the nearest million dollars and the payout ratio % to the nearest ones place. ($ millions) 3 3 150 300 120 ? 220 4 200 352 120 ? 220 5 300 450 120 5 ? 220
This is a more difficult but informative problem. James Brodrick & Sons, Incorporated, is growing rapidly and, if at all possible, would like to finance its growth without selling new equity. Selected information from the company's five-year financial forecast follows. Year Earnings after tax ($ millions) Capital investment ($ millions) Target book value debt-to-equity ratio (%) Dividend payout ratio (%) Marketable securities ($ millions) (Year marketable securities = $220 million) Year Dividends (millions) Divident Payout ratio (%) 1 1 100 170 120 2 ? 220 2 110 300 120 ? 220 a. According to this forecast, what dividends will the company be able to distribute annually without raising new equity and while maintaining a balance of $220 million in marketable securities? What will the annual dividend payout ratio be? (Hint: Remember sources of cash must equal uses at all times.) Note: Round dividends to the nearest million dollars and the payout ratio % to the nearest ones place. ($ millions) 3 3 150 300 120 ? 220 4 200 352 120 ? 220 5 300 450 120 5 ? 220
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
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