Purple Hedgehog Forestry Inc. is expected to generate $180,000,000 in net40%income over the next year. Purple Hedgehog Forestry's stockholders expect it toEquity60%Debtmaintain its long-run dividend payout ratio of 30% of earnings.If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budgetit can support with this year's expected net income isPurple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of thesestatements best describes how this will affect the firm's annual dividend, assuming that all other factors are heldconstant?Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision.Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.What kind of company is most likely to follow a strict residual distribution policy?All companiesA firm with stable, predictable earnings and investmentA firm whose earnings are cyclical and follow the economyA firm with highly variable earnings and investmentGaven Industries, which is in the same sector as Purple Hedgehog Forestry, exhibits very stable and predictableearnings, but its capital investments tend to be lumpy. This means that Gaven's required capital investmentspending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budgetto be quite large. Should Gaven Industries be following a strict residual distribution policy?NoYes

The residual distribution policy refers to that policy which is followed by the organization that’s having stable earnings and many investment opportunities.The computation of the capital budget is as follows:If organization using more equity and less debts in its capital structure than the organization will pay a smaller annual dividend if it goes forward with this decision .A firm with stable, predictable earnings and investment is most likely to follow a strict residual distribution policy.No, the organization should not follow the strict residual distribution policy.

Business

Finance

Purple Hedgehog Forestry Inc. is expected to generate $180,000,000 in net 40% income over the next year. Purple Hedgehog Forestry's stockholders expect it to Equity 60% Debt maintain its long-run dividend payout ratio of 30% of earnings. If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held

Purple Hedgehog Forestry Inc. is expected to generate $180,000,000 in net 40% income over the next year. Purple Hedgehog Forestry's stockholders expect it to Equity 60% Debt maintain its long-run dividend payout ratio of 30% of earnings. If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held

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

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: WorldTrans is forecasting an EPS of $5.00 for the coming year on its 500,000 outstanding shares of…

A: The amount that is borrowed by the company from financial institutions, banks, or by issuing the…

Q: a. What is the total value of Icarus? b. What is the value of the company's equity?

A: Post tax kd = 6% X (1 - 21%) = 4.74%WACC = (4.74% X 30%) + (11% X 70%) = 9.122%Net cash…

Q: The Solar Utility company has a projected a capital budget of $5 million for 2020. Thecapital…

A: The before-tax cost of debt is 9.03%.The after-tax cost of debt is calculated below:

Q: Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and…

A: WACC is the weighted average cost of equity and after-tax cost of debt. WACC is used as cost of…

Q: (Financial forecasting-discretionary financing needs) Sambonoza Enterprises projects its sales next…

A: Sambonoza's financing requirements or total assets for the coming year are $835,000 or $0.84…

Q: United Builders wants to maintain a target capital structure with 30% debt and 70% equity. Its…

A: Dividend payout ratio measures the dividend payout in relation to the net income generated by the…

Q: The capital budget forecast for the Santano Company is $725,000. The CFO wants to maintain a target…

A: Dividend payout is the level of dividends payments based on the net income of the company for a…

Q: Icarus Airlines is proposing to go public, and you have been given the task of estimating the value…

A: Given The percentage of debt is 35% Cost of debt is 5% Cost of equity is 12%

Q: Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $8 billion in…

A: For calculating growth rate, first we need to find cost of equity by using WACC equation WACC =cost…

Q: carus Airlines is proposing to go public, and you have been given the task of estimating the value…

A: WACC:=14% ×75%+7%×(1-21%)×25%=11.88% Answer a) Total value :=($63 -$25)11.88% -4%= $482 million

Q: Icarus Airlines is proposing to go public, and you have been given the task of estimating the value…

A: WACC is the cost of capital of the company and is the weighted cost of equity and weighted cost of…

Q: Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its…

A: Debt = 40%Equity = 60%Cost of debentures = 9%Retained earnings = $125 millionNet income growth rate…

Q: Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $8 billion in…

A: The growth rate can be found by using the dividend discount model which is as follows:The another…

Q: Harvey's Industrial Plumbing Supply's target capital structure consists of 40% debt and 60% equity.…

A: The residual dividend policy:When a company follows a residual policy, it usually meets the capital…

Q: Medtronics has a target capital structure that consists of 55% debt and 45% equity. Medtronics'…

A: As per residual dividend policy,Dividends = Net Income - (Target Equity Ratio x Total Capital…

Q: AGE Inc.'s assets in place will be worth either $ 250 Million or $100 million in one year depending…

A: a. Yes, AGE Inc. should undertake the project. The project offers a safe return of $75 million in…

Q: Determine if this project is worthwhile to proceed

A: Net Present Value: It is the value derived from the difference between the cash outflow and…

Q: Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $8 billion in…

A: Weight of Equity = we = 55%Weight of Debt = wd = 45%Assets = a = $8 billionWeighted Average Cost of…

Q: Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion…

A: Equity weight = 60% Debt weight = 40%Operating assets = $11 billionBefore-tax cost of debt = 8%WACC…

Q: Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $11 billion…

A: Weight of Equity = we = 40%Weight of Debt = wd = 60%Assets = a = $11 billionWeighted Average Cost of…

Q: Kahn Inc. has a target capital structure of 65% common equity and 35% debt to fund its $8 billion in…

A: Given: Particulars Debt Common equity Weight 35% 65% Operating assets 8 Billion…

Q: a). What is the company's expected growth vate? % b). If the firm's net income is expected to be…

A: Growth Rate:The growth rate, often referred to as the "earnings growth rate" or "revenue growth…

Q: Puckett Products is planning for $3 million in capital expenditures next year. Puckett's target…

A: Ratio analysis is a method of measuring the financial position of the organization with different…

Q: Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $11 billion…

A: Capital structure refers to the sum of the debt and equity issued by the company for financing the…

Q: Berry Industries is evaluating four projects for potential inclusion in their 2016 capital budget.…

A: A company's retained profits are the profits left over after paying all direct and indirect costs,…

Q: XYZ Corp has a capital budget of $10M for next year. The company has a target capital structure of…

A: Net income means the amount left after deducting all the expenses from the revenue. Net income is…

Q: Dyrdek Enterprises has equity with a market value of $10.9 million and the market value of debt is…

A: Net present value refers to the method of capital budgeting used for evaluating the viability of the…

Question

100%

Purple Hedgehog Forestry Inc. is expected to generate $180,000,000 in net
40%
income over the next year. Purple Hedgehog Forestry's stockholders expect it to
Equity
60%
Debt
maintain its long-run dividend payout ratio of 30% of earnings.
If the firm wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget
it can support with this year's expected net income is
Purple Hedgehog Forestry is considering using more equity and less debt in its capital structure. Which of these
statements best describes how this will affect the firm's annual dividend, assuming that all other factors are held
constant?
Purple Hedgehog Forestry's annual dividend will be greater if it goes forward with this decision.
Purple Hedgehog Forestry will pay a smaller annual dividend if it goes forward with this decision.
What kind of company is most likely to follow a strict residual distribution policy?
All companies
A firm with stable, predictable earnings and investment
A firm whose earnings are cyclical and follow the economy
A firm with highly variable earnings and investment
Gaven Industries, which is in the same sector as Purple Hedgehog Forestry, exhibits very stable and predictable
earnings, but its capital investments tend to be lumpy. This means that Gaven's required capital investment
spending is usually relatively low, but every few years, some sizable expenditures will cause the firm's capital budget
to be quite large. Should Gaven Industries be following a strict residual distribution policy?
No
Yes

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Trending now

This is a popular solution!

Step by step

Solved in 5 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Petersen Co. has a capital budget of $ 910 . The company wants to maintain a target capital structure that is 65 percent debt and remaining percent is equity. The company forecasts that its net income this year will be $ 809 . If the company follows a residual distribution policy (with all distributions in the form of cash dividends), what will be its payout ratio? Enter your answer to the nearest .1%. Enter your answer as a whole number, thus 25.1% would be 25.1 not .251. Do not use % signs in your answer. Your Answer: Answer
The projected capital budget of Kandell Corporation is $575,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $575,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out? Select the correct answer. a. $344,887 b. $345,000 c. $344,831 d. $344,944 e. $344,774
GBATT has a capital need of $100 million to fund its operations. GBATT has an equity investor that has made an investment in the common stock of GBATT for 60% of this amount but there is the anticipation is that they will earn a 15% return on this investment through capital returns and dividends. This level of anticipated return takes into account the anticipated risk in the investment. With this amount of capital support, GBATT was able to find a lender who will provide the balance of the capital needed at an interest rate of 10% with such debt to be paid out over 10 years. Such lender will require GBATT to fully collateralize its buildings in support of its bond payments. What is the cost of capital in this example?
MaxValue is expected to have EBIT of $1,500,000.00 one year from now. Because MaxValue is in a mature industry, the CEO expects the company's EBIT to grow at the stable growth rate of 2% per year forever. The firm's WACC is 9% and its corporate tax rate is 40%. Capital expenditures are 25% of EBIT while changes in networking capital is 10% of EBIT. Depreciation is 15% of EBIT. What is the value of the firm? a) $21,428,571.43 b) $8,742,857.14 c) $17,142,857.14 d) $8,571,428.57 e) $16,071,428.57
Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before - tax cost of debt of 10%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $4, and the current stock price is $30. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. If the firm's net income is expected to be $1.4 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio) ROE
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 9%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $33. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % If the firm's net income is expected to be $1.9 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio)ROE %
Dyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858
Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 11%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $26. a. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % b. If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate (1-Payout ratio)ROE %
Your firm has an ROE of 11.1%, a payout ratio of 29%, $585,100 of stockholders' equity, and $420,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you need to issue? The Tax Cuts and Jobs Act of 2017 temporarily allows 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter anc in these problems in anticipation of the return of standard depreciation practices during your career. The sustainable growth rate is %. (Round to three decimal place.) The ending total assets at the sustainable growth rate will be $ (Round to the nearest dollar.) Because the firm grew at its sustainable growth rate, its debt/equity ratio remains constant at 0.717826 and the debt-to-assets ratio will be 0.417869. Thus, the new debt in the capital structure will be 0.417869×$1,084,312= $453,100. Since the firm started at $420,000, it will issue about $33,100 in additional debt.…

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS