Assume a Miller-Modigliani (1961) perfect world. Appel Inc. has 8 million shares outstanding, currently priced at $90 each. The company has experienced significant performance gains over previous years, which are expected to continue in the future. Earnings for the most recent period were $200 million. The company is confident that next year earnings will be higher by $100 million than in the previous year. The company plans to continue its development by investing $342 million in capital projects next year. However, the company will need to raise external finance of $50 million. a) What will be the dividend payout ratio of Appel Inc. next year? (b) You are an investor who owns 100 shares of Appel Inc. Calculate your wealth before the dividend payment and after the dividend payment. Assume that the cumulative-dividend stock price is the same as the current price, and Appel Inc. distributes dividends in the amount specified in the previous question. (c) Will the introduction of taxes in the economy change your answer in the previous question and why? (d) If Appel Inc. keeps its investment plans for next year, but it believes that it must also maintain a target dividend payout ratio of 8%. How should the company adjust its previous plans for raising external finance?
Assume a Miller-Modigliani (1961) perfect world. Appel Inc. has 8 million shares outstanding, currently priced at $90 each. The company has experienced significant performance gains over previous years, which are expected to continue in the future. Earnings for the most recent period were $200 million. The company is confident that next year earnings will be higher by $100 million than in the previous year. The company plans to continue its development by investing $342 million in capital projects next year. However, the company will need to raise external finance of $50 million.
a) What will be the dividend payout ratio of Appel Inc. next year?
(b) You are an investor who owns 100 shares of Appel Inc. Calculate your wealth before the dividend payment and after the dividend payment. Assume that the cumulative-dividend stock price is the same as the current price, and Appel Inc. distributes dividends in the amount specified in the previous question.
(c) Will the introduction of taxes in the economy change your answer in the previous question and why?
(d) If Appel Inc. keeps its investment plans for next year, but it believes that it must also maintain a target dividend payout ratio of 8%. How should the company adjust its previous plans for raising external finance?
Hi, since you have posted a question with multiple sub-parts, we will answer the first three, as per the authoring guideline. Please re-post the other separately.
Given:
Current stock price = $90
Number of shares outstanding = 8 million
Earnings last year = $200 million
Earnings next year will increase by = $100 million
Capex next year = $342 million
External finance = $50 million
Step by step
Solved in 4 steps
