Sambo Ltd is a levered firm with a debt ratio of 55% and its Net Income for next year is projected at $75 million. There are 12 million shares outstanding at a price of $27.47 per share. Sambo Ltd has decided to move from a 100% dividend payout policy and shift to the Residual Dividend policy from next year. a) What is the EPS and DPS for Sambo under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million, would Sambo Ltd be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Ignore taxes. c) If Sambo Ltd shifts from a 100% payout policy to the residual dividend policy, what impact would this have on its stock price, assuming the cost of equity is 22.75% and the dividend growth rate is projected at 5%? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated through this computation? (Assume constant growth rate stock valuation model for computing stock price)

Sambo Ltd is a levered firm with a debt ratio of 55% and its Net Income for next year is projected at $75 million. There are 12 million shares outstanding at a price of $27.47 per share. Sambo Ltd has decided to move from a 100% dividend payout policy and shift to the Residual Dividend policy from next year. a) What is the EPS and DPS for Sambo under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million, would Sambo Ltd be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Ignore taxes. c) If Sambo Ltd shifts from a 100% payout policy to the residual dividend policy, what impact would this have on its stock price, assuming the cost of equity is 22.75% and the dividend growth rate is projected at 5%? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated through this computation? (Assume constant growth rate stock valuation model for computing stock price)

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

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A company expects a 20% return on equity invested entirely in new projects. The company's management plans to retain 30% of its net profits. Earnings per share for the coming year are €3 and the expected return for investors is 12% for investments with a similar risk to that of the company in question. What will the share price be and the P/E ratio if the company paid the whole of its net profits in dividends?
company presently pays no dividend. You anticipate company will pay an annual dividend of $1.00 per share two years from today and you expect dividends to grow by 3% per year thereafter. If company’s equity cost of capital is 14%, then what is a fair value for a share of company today? Enter answer rounded to the nearest cent.
Keet Industries is currently an all-equity firm that pays no taxes. The market value of the firm’s equity is £1,500,000. The cost of the unlevered equity is 12% per annum. Keet plans to issue £500,000 in debt and use the proceeds to repurchase shares. The cost of debt is 8% per annum. What will Keet's cost of equity be after the share repurchase? Select one: 9% 12% 14% 20% None of the above
REH Corporation's most recent dividend was $2.82 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety of proposals are being considered by management to redirect the firm's activities. Determine the impact on share price for each of the following proposed actions. a. Do nothing, which will leave the key financial variables unchanged. b. Invest in a new machine that will increase the dividend growth rate to 8% and lower the required return to 13%. c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 9% and raise the required return to 17%. d. Merge with another firm, which will reduce the growth rate to 2% and raise the required return to 18%. e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 9% and increase the required return to 17%.
Cooperton Mining just announced it will cut its dividend from $3.92 to $2.43 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.1% rate, and its share price was $51.64. With the planned expansion, Cooperton's dividends are expected to grow at a 4.7% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $. (Round to the nearest cent.)
Cooperton Mining just announced it will cut its dividend from $4.03 to $2.69 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.3% rate, and its share price was $48.51. With the planned expansion, Cooperton's dividends are expected to grow at a 4.6% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $ (Round to the nearest cent.)
Cooperton Mining just announced it will cut its dividend from $4.08 to $2.45 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.5% rate, and its share price was $49.63. With the planned expansion, Cooperton's dividends are expected to grow at a 4.8% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $ (Round to the nearest cent.)
Abl ltd. Paid a dividend of $250000 this year. The current return to shareholders of the companies in the same industry an Abl ltd. is 12%, although it is expected that an additional risk premium of 2% will be applicable to Abl ltd., being a smaller and unquoted company. Compute the expected valuation of Abl ltd., if : 1. The current level of dividend is expected to continue into the foreseeable future 2. The dividend is expected to grow at a rate of 4%pa into the foreseeable future 3. The dividend is expected to grow at a 3% rate for three years and 2% afterwards
Kennedy Limited is an all-equity publicly listed firm with 600,000 shares currently on issue trading at $20 per share and is expected to generate $1,800,000 in EBIT p.a. in perpetuity. They are considering immediately repurchasing one third their equity at the current market price and replacing this with debt with an interest cost of 4% per annum. Assume that Kennedy Limited operate in a perfect capital market with no taxes, information costs, transaction costs etc. a) Demonstrate the impact of the change in capital structure on the (i) Net Income, (ii) ROE and (iii) ROA for Kennedy Limited. b) For what value of EBIT will ROE be unaffected by Kennedy Ltd’s decision to repurchase shares?

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