question archive TeamX Corporation is reviewing its capital budget for the upcoming year
TeamX Corporation is reviewing its capital budget for the upcoming year
Subject:FinancePrice:3.87 Bought7
TeamX 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 company’s target capital structure is 60 percent equity and 40 percent debt; it has 1,000,000 shares of common equity outstanding; and its net income is $8 million. The company forecasts that it would require $10 million to fund all of its profitable (that is, positive NPV) projects for the upcoming year.
a) If Brown follows the residual dividend model, what will be the company’s dividend per share?
b) Suppose that Brown’s management wants to maintain the $3.00 DPS. In addition, the company wants to maintain its $10 million capital budget. What is the minimum dollar amount of new common stock that the company would have to issue in order to meet its objectives?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
(a) Dividend Per Share = $3
Target Ratio for Equity = 60%
Target Ratio for Debt = 40%
No. of outstanding shares = 1,000,000
Net Income = $8,000,000
Total Capital budget = $10,000,000
Retained Earning Required = Taeget Equity Ratio * Total Capital Budget
= 0.60 * 10,000,000 = $6,000,000
So Dividend Per Share according to Residual Dividend Model
= (8,000,000 - 6,000,000)/1,000,000
DPS = $2
(b) From the above calculation, we can determine Dividend Payout Ratio:
Dividend Payout Ratio = (8,000,000 - 6,000,000)/8,000,000 = 0.25 or 25%
Desired DPS = $3
Retained Earning Per Capital Budget = 8,000,000 - (3 * 1,000,000) = $5,000,000
Company have to raise $5,000,000 i.e. ($10,000,000 - $5,000,000{Retained Earning}) to maintain its objectives.
