4. Needham Inc. is a steel company that reported $ 100 million in net income in the just- completed financial year. The firm has a payout ratio of 30% and the dividends in the most recent year were exactly were exactly equal to the free cash flows to equity. The firm was all equity financed. a. Assume that you expect Needham to maintain a growth rate of 10% a year in net income and reinvestment (net cap ex and change in working capital) for the next year and that you anticipate that the firm will fund 20% of its new investments (net cap ex and working capital) with debt. If you maintain the policy of paying out the entire free cash flow to equity as dividends, what payout ratio can the firm afford next year? b. Needham currently has a cash balance of $ 100 million. If Needham increases its payout ratio to 40% and buys back $ 50 million in new stock next year, estimate how much its cash balance will be at the end of next year. (You can use the net income, reinvestment and debt numbers that you estimated in part a)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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4. Needham Inc. is a steel company that reported $ 100 million in net income in the just-
completed financial year. The firm has a payout ratio of 30% and the dividends in the most
recent year were exactly were exactly equal to the free cash flows to equity. The firm was
all equity financed.
a. Assume that you expect Needham to maintain a growth rate of 10% a year in net income
and reinvestment (net cap ex and change in working capital) for the next year and that you
anticipate that the firm will fund 20% of its new investments (net cap ex and working
capital) with debt. If you maintain the policy of paying out the entire free cash flow to
equity as dividends, what payout ratio can the firm afford next year?
b. Needham currently has a cash balance of $ 100 million. If Needham increases its payout
ratio to 40% and buys back $ 50 million in new stock next year, estimate how much its
cash balance will be at the end of next year. (You can use the net income, reinvestment and
debt numbers that you estimated in part a)
Transcribed Image Text:4. Needham Inc. is a steel company that reported $ 100 million in net income in the just- completed financial year. The firm has a payout ratio of 30% and the dividends in the most recent year were exactly were exactly equal to the free cash flows to equity. The firm was all equity financed. a. Assume that you expect Needham to maintain a growth rate of 10% a year in net income and reinvestment (net cap ex and change in working capital) for the next year and that you anticipate that the firm will fund 20% of its new investments (net cap ex and working capital) with debt. If you maintain the policy of paying out the entire free cash flow to equity as dividends, what payout ratio can the firm afford next year? b. Needham currently has a cash balance of $ 100 million. If Needham increases its payout ratio to 40% and buys back $ 50 million in new stock next year, estimate how much its cash balance will be at the end of next year. (You can use the net income, reinvestment and debt numbers that you estimated in part a)
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