Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity.

The company anticipates that its capital budget for the upcoming year will be $5,000,000. If Axel reports net income of $4,000,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio? 70% Debt; 30% Equity; Capital budget = $5,000,000; NI = $4,000,000; PO = ? Equity retained = 0.3($5,000,000) = $1,500,000. NI Additions to RE Earnings remaining Payout = $4,000,000 1,500,000 $2,500,000

$2,500, 000 = 62.5% $4, 000, 000

#2 Gamma Medicals stock trades at $100 a share. The Company is contemplating a 5-for-3 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the companys stock price following the stock split? P0 = $100; Split = 3 for 2; New P0 = ? $100 = $66.67. 3/2 #3 Beta Industries has net income of $3,000,000 and it has 2,000,000 shares of common stock outstanding. The companys stock currently trades at $30 per share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market. The repurchase is expected to have no effect on net income or the companys P/E ratio. What will be Betas stock price following the stock repurchase? NI = $3,000,000; Shares = 2,000,000; P0 = $30; Repurchase = 20%; New P0 = ? Repurchase = 0.2 2,000,000 = 400,000 shares. Repurchase amount = 400,000 $30 = $12,000,000.

EPSOld =

NI Shares

$3, 000, 000 = $1.5 2, 000, 000

P/E =

$30 = 20 . $1.5 $3, 000, 000 $3, 000, 000 = = $1.86. 2, 000, 000 400, 000 1, 600, 000

EPSNew =

PriceNew = EPSNew P/E = $1.86(20) = $37.50.

#4 After a 5-for-1 stock split, Strasburg Company paid a dividend of $0.80 per new share, which represents a 8% increase over last years pre-split dividend. What was last years dividend per share? DPS after split = $0.80. Equivalent pre-split dividend = $0.80(5) = $4.00. New equivalent dividend = Last years dividend(1.08) $4.00 = Last years dividend(1.08) Last years dividend = $4.00/1.08 = $3.70

#5 Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10 million investment in plant and machinery. The firm wants to maintain a 45% debt-to-total-assets ratio in its capital structure. It also wants to maintain its past dividend policy of distributing 40% of last years net income. In 2008, net income was $4 million. How much external equity must Northern Pacific seek at the beginning of 2009 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure. Retained earnings = Net income (1 Payout ratio) = $4,000,000(0.60) = $2,400,000.

External equity needed: Total equity required = (New investment)(1 Debt ratio) = $10,000,000(0.55) = $5,500,000.

New external equity needed = $5,500,000 $2,400,000 = $3,100,000.