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.
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
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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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