What will price be in 1 year? c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.) d. What is your estimate of DEQS’s intrinsic value per share if you expected DEQS to pay out only 10% of earnings starting in year 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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What will price be in 1 year?
c. What do you expect to happen to price in the following year? (Round your dollar value to 2 decimal places.)
d. What is your estimate of DEQS’s intrinsic value per share if you expected DEQS to pay out only 10% of earnings starting in year 6? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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- Current liabilities Bon Nebo Co. sold 25,000 annual subscriptions of Bjorn for 85 during December 20Y5. These new subscribers will receive monthly issues, beginning in January 20Y6. In addition, the business had taxable income of 840,000 during the first calendar quarter of 20Y6. The federal tax rate is 40%. A quarterly tax payment will be made on April 12, 20Y6. Prepare the current liabilities section of the balance sheet for Bon Nebo Co. on March 31, 20Y6.ALTERNATIVE DIVIDEND POLICIES In 2017, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2017 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2018, earnings are expected to jump to 14.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It Ls predicted that Keenan will not be able to maintain the 2018 level of earnings growth because the high 2018 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2018, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2018 assuming that it follows each of the following policies: 1. Its 2018 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2017 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2018 and to have the dividend grow at 10% after 2018. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g - Retention rate ROE = (1.0 Payout rate)(ROE)] e. Does a 2018 dividend of 9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.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?
- 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?ALTERNATIVE DIVIDEND POLICIES In 2013, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2013 was a normal year and that tor the past 10 years, earnings have grown at a constant rate of 10%. However, in 2014, earnings are expected to jump to 10.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It is predicted that Keenan will not be able to maintain the 2014 level of comings growth because the high 2014 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2014, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenan s total dividends for 2014 assuming that it follows each of the following policies: 1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2013 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify you answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2014 and to have the dividend grow at 10% after 2014. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE (1.0 Payout rate (ROE).] e. Does a 2014 dividend of 9,000,000 seem, reasonable in view of your answers to Parte c and d? If not, should the dividend be higher or lower? Explain your answer.ALTERNATIVE DIVIDEND POLICIES In 2015, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2015 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2016, earnings are exported to jump to 14.4 million and the firm expects to have profitable investment opportunities of 8.4 million. It is predicted that Keenan will not be able to maintain the 2016 level of earnings growth because the high 2016 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2016, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2016 assuming that it follows each of the following policies: 1. Its 2016 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2015 dividend payout ratio. 3. It USOS a pure residual dividend policy (40% of the 8.4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate? and the extra dividend being sot according to the residual dividend policy. a. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer. b. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2016 and to have the dividend grow at 10% after 2016. The stocks total market value is 100 million. What is the companys cost of equity? c. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE = (1.0 Payout rate)(ROE)] d. Does a 2016 dividend of 9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.
- 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?ALTERNATIVE DIVIDEND POLICIES In 2014, Keenan Company paid dividends totaling 3,600,000 on net income of 10.8 million. Note that 2014 was a normal year and that for the past 10 years, earnings have grown at a constant rate of 10%. However, in 2015, earnings are expected to jump to 14 4 million and the firm expects to have profitable investment opportunities of 8 4 million. It is predicted that Keenanwill not be able tomaintain the 2015 level of earnings growth because the high 2015 earnings level is attributable to an exceptionally profitable new product line introduced that year. After 2015, the company will return to its previous 10% growth rate. Keenans target capital structure is 40% debt and 60% equity. a. Calculate Keenans total dividends for 2015 assuming that it follows each of the following policies: 1. Its 2015 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. 2. It continues the 2014 dividend payout ratio. 3. It uses a pure residual dividend policy (40% of the 8 4 million investment is financed with debt and 60% with common equity). 4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual dividend policy. b. Which of the preceding policies would you recommend? Restrict your choices to the ones listed but justify your answer. c. Assume that investors expect Keenan to pay total dividends of 9,000,000 in 2015 and to have the dividend grow at 10% after 2015. The stocks total market value is 180 million. What is the companys cost of equity? d. What is Keenans long-run average return on equity? [Hint: g = Retention rate ROE =(1 0 Payout rate) (ROE).] e. Does a 2015 dividend of 9,000,000 seem reasonable in view of your answers to parts c and d? If not, should the dividend be higher or lower? Explain your answer.ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 out of annual earnings per share of 2.25. Currently, Rubenstein Bros.' stock is selling for 12.50 per share. Adhering to the company's target capital structure, the firm has 10 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) b. What is the stock's required return? c. If the firm changed its dividend policy and paid an annual dividend of 1.50 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firms new expected long-run growth rate and required return? d. Suppose instead that the firm has decided to proceed with its original plan of dis bursing 0.75 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50. In other words, for every 12.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalist ion? (Hint. Remember that market capitalization = P0 number of shares outstanding.) e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the companys earnings per share be diluted?
- Problem 18-02 Over the last five years, corporation A has been consistently profitable. Its earnings before taxes were as follows: Year 1 2 3 4 5 Earnings $1,200 $3,000 $4,400 $5,300 $4,800 If the corporate tax rate was 26 percent, what were the firm's income taxes for each year? Round your answers to the nearest dollar. Year 1 2 3 4 5 Taxes $ $ $ $ $ Unfortunately, in year 6 the firm experienced a major decline in sales, which resulted in a loss of $10,700. What impact will the loss have on the firm's taxes for each year if the permitted carry-back is two years? If the answer is zero, enter "0". Round your answers to the nearest dollar. Year 1 2 3 4 5 New Taxes $ $ $ $ $ Total tax refund: $1s all-equity firm with its expected annual before-tax earnings of $20 million in perpetuity. The current required return on the firm's equity is 16 percent. The firm distributes all of its earnings as dividends at the end of each year. Currently, the company has 1 million shares outstanding and is subject to a corporate tax rate of 35 percent. To help improve its stock price performance during a time of poor economic conditions due to the Covid-19 crisis, the firm is considering a recapitalization under which it will issue S30 million of perpetual 9 percent debt and use the proceeds to buy back shares. 1) Calculate the value of the company before the recapitalization plan is announced. What is the value of equity before the announcement? What is the price per share? 2) Use the APV method to calculate the company value after the recapitalization plan is announced.What is the value of equity after the announcement? What is the price per share? 3) Use the flow to equity method to…Ch 9. Use the following information for Question 22 and 23. The newspaper reported last week that SunRise Enterprises earned $34.19 million this year. The report also stated that the firm’s return on equity is 13 percent. The firm retains 85 percent of its earnings. What will next year's earnings be? Round to the nearest dollar and format as "XX,XXX,XXX"