QUESTION 2: Sandhurst Enterprises has a target debt/equity ratio of 1/3. It has internally generated after tax cash flows of $118,000,000. Which can be paid out in whole or in part as dividend? It has a corporate tax rate of 40% and cost of capital of 12%. It is considering the following projects. Project U a perpetual project requires investment of $30,000,000. It will provide before tax cash flow of $6,000,000 one year from today and $6,300,000 two years from today. After that cash flow will decline at the rate of 6% per year forever. Its required rate of return is 12%. Project V a perpetual project requires investment of $50,000,000. It will provide before tax cash flow of $10,000,000 per year in perpetuity. Its required rate of return is 10%. Project W a 10 year project requires investment of $70,000,000. It will provide before tax cash flow of $15,000,000 one year from today. After that cash flows will rise at the rate of 10% per year for 9 years. Its required rate of return is 14%. Project X a 25 year project requires $60,000,000 investment. It will provide after tax cash flows of $5,000,000 per year for 10 years and after that $10,000,000 per year for an additional 15 years. Its required rate of return is 8%. Using the residual dividend policy approach determine which of these four projects Sandhurst should invest in and what should be the dividend payout.
QUESTION 2: Sandhurst Enterprises has a target debt/equity ratio of 1/3. It has internally generated after tax cash flows of $118,000,000. Which can be paid out in whole or in part as dividend? It has a corporate tax rate of 40% and cost of capital of 12%. It is considering the following projects. Project U a perpetual project requires investment of $30,000,000. It will provide before tax cash flow of $6,000,000 one year from today and $6,300,000 two years from today. After that cash flow will decline at the rate of 6% per year forever. Its required rate of return is 12%. Project V a perpetual project requires investment of $50,000,000. It will provide before tax cash flow of $10,000,000 per year in perpetuity. Its required rate of return is 10%. Project W a 10 year project requires investment of $70,000,000. It will provide before tax cash flow of $15,000,000 one year from today. After that cash flows will rise at the rate of 10% per year for 9 years. Its required rate of return is 14%. Project X a 25 year project requires $60,000,000 investment. It will provide after tax cash flows of $5,000,000 per year for 10 years and after that $10,000,000 per year for an additional 15 years. Its required rate of return is 8%. Using the residual dividend policy approach determine which of these four projects Sandhurst should invest in and what should be the dividend payout.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter6: Accounting For Financial Management
Section: Chapter Questions
Problem 11P: The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are...
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Transcribed Image Text:QUESTION 2:
Sandhurst Enterprises has a target debt/equity ratio of 1/3. It has internally generated after tax
cash flows of $118,000,000. Which can be paid out in whole or in part as dividend? It has a
corporate tax rate of 40% and cost of capital of 12%. It is considering the following projects.
Project U a perpetual project requires investment of $30,000,000. It will provide before tax cash
flow of $6,000,000 one year from today and $6,300,000 two years from today. After that cash
flow will decline at the rate of 6% per year forever. Its required rate of return is 12%.
Project V a perpetual project requires investment of $50,000,000. It will provide before tax cash
flow of $10,000,000 per year in perpetuity. Its required rate of return is 10%.
Project W a 10 year project requires investment of $70,000,000. It will provide before tax cash
flow of $15,000,000 one year from today. After that cash flows will rise at the rate of 10% per
year for 9 years. Its required rate of return is 14%.
Project X a 25 year project requires $60,000,000 investment. It will provide after tax cash flows
of $5,000,000 per year for 10 years and after that $10,000,000 per year for an additional 15
years. Its required rate of return is 8%.
Using the residual dividend policy approach determine which of these four projects Sandhurst
should invest in and what should be the dividend payout.
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