FINANCIAL MANAGEMENT(LL)-TEXT
FINANCIAL MANAGEMENT(LL)-TEXT
16th Edition
ISBN: 9781337902618
Author: Brigham
Publisher: CENGAGE L
bartleby

Concept explainers

bartleby

Videos

Question
Book Icon
Chapter 14, Problem 11P

a)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget.

a)

Expert Solution
Check Mark

Explanation of Solution

Given information:

Capital budget is $15,000,000

Net income is $11 million,

DPS dividend per share is $2,

Outstanding shares 1 million,

Capital structure is 30% debt and 70% equity.

Calculation of retained earnings:

Retained earnings=$15,000,000×0.70=$10,500,000

Therefore, retained earnings needed is amounted to $10,500,000

b)

Summary Introduction

To determine: Dividend per share (DPS) and pay-out ratio.

b)

Expert Solution
Check Mark

Explanation of Solution

Based on the residual dividend model, the amount $500,000 ($11,000,000-$10,500,000) is available for dividends.

Calculation of dividend per share:

DPS=DividendsavailableOutstandingshares=$500,0001,000,000=$0.50

Therefore, dividend per share is $0.50

Calculation of pay-out ratio:

Pay-out ratio=DividendsavailableNetincome=$500,000$11,000,000=4.55%

Therefore, pay-out ratio is 4.55%

c)

Summary Introduction

To determine: Amount of retained earnings needed by company K to fund its capital budget, if it maintains $2 DPS for next year.

c)

Expert Solution
Check Mark

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000$2(1,000,000)=$11,000,000$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

d)

Summary Introduction

To determine: Whether company maintains its current capital structure with its DPS and maintain $15 million capital budget without raising new common stock.

d)

Expert Solution
Check Mark

Explanation of Solution

Person X views that, company does not maintain because, if it maintains $2 DPS, only $9 million of retained earnings is available for capital projects. However, if the firm is to keep up its current capital structure of $10.5 million of equity is needed. This may necessitate the company to issue $1.5 million of common stock.

e)

Summary Introduction

To determine: Portion of current year capital budget could have to be financed by debt.

e)

Expert Solution
Check Mark

Explanation of Solution

Retained earnings available is $9,000,000

Calculation of Capital budget financed with Retained earnings:

Percentageofcapital budget=Retainedearingsavailablecapitalbudget=$9,000,000$15,000,000=60%

Therefore, percentage of capital budget financed by retained earnings is 60%

Calculation of Capital budget financed with debt:

Percentageofcapital budget=Debtavailablecapitalbudget=$6,000,000$15,000,000=40%

Therefore, percentage of capital budget financed by debt is 40%

f)

Summary Introduction

To determine: External (new) equity needed.

f)

Expert Solution
Check Mark

Explanation of Solution

Equityneeded=$15,000,000×0.70=$10,500,000

Calculation of retained earnings:

Retained earnings available=$11,000,000$2(1,000,000)=$11,000,000$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Calculation of external equity needed:

External equity needed=$10,500,000$9,000,000=$1,500,000

Therefore, external (new) equity needed is $1,500,000

g)

Summary Introduction

To determine: Company’s capital budget for next year.

g)

Expert Solution
Check Mark

Explanation of Solution

Calculation of retained earnings:

Retained earnings available=$11,000,000$2(1,000,000)=$11,000,000$2,000,000=$9,000,000

Therefore, retained earnings available is amounted to $9,000,000

Retained earnings availability is equals the required equity to find new capital budget.

Calculation of capital budget using required equity:

Requiredequity=Capitalbudget(Targetequityratio)$9,000,000=Capitalbudget(0.7)Capitalbudget=$12,857,143

Hence, capital budget is $12,857,143

Therefore, if Company R cuts its capital budget from $15 million to $12.86 million, it will maintain its DPS $2.00, its current capital structure and still follow its residual dividend policy.

h)

Summary Introduction

To determine: Actions taken by company when its forecasted retained earnings are less than retained earnings required.

h)

Expert Solution
Check Mark

Explanation of Solution

Company can take any one of the following four actions,

  • New issue of common stock,
  • Cuts its capital budget,
  • Company cuts the dividends,
  • Change the capital structure by using more debt funds.

Company should realize that every of these actions is not while not consequences to its cost of capital, stock price or both.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80
Your firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $81,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR %
QUESTION 1 Examine the information provided below and answer the following question. (10 MARKS) The hockey stick model of start-up financing, illustrated by the diagram below, has received a lot of attention in the entrepreneurial finance literature (Cumming & Johan, 2013; Kaplan & Strömberg, 2014; Gompers & Lerner, 2020). The model is often used to describe the typical funding and growth trajectory of many startups. The model emphasizes three main stages, each of which reflects a different phase of growth, risk, and funding expectations. Entrepreneur, 3 F's Debt(banks & microfinance) Research Business angels/Angel Venture funds/Venture capitalists Merger, Acquisition Grants investors PO Public market Growth (revenue) Break even point Pide 1st round Expansion 2nd round 3rd round Research commercial idea Pre-seed Initial concept Seed Early Expansion Financial stage Late IPO Inception and prototype Figure 1. The hockey stick model of start-up financing (Lasrado & Lugmayr, 2013) REQUIRED:…
Knowledge Booster
Background pattern image
Finance
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.
Recommended textbooks for you
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License