# Text Problem Sets

**Topics:**Dividend, Dividend yield, Cash flow statement

**Pages:**4 (993 words)

**Published:**February 28, 2013

Debt-Service Coverage Ratio = (EBIT + 1/3 Rentals) / (Interest Expense + 1/3 Rentals + Principal Repayments / (1 - T)) = ($30 + $15 / 3) / ($10 + $15 / 3 + $6 / (1 - 0.40)) = 1.40

A-4 (WACC with rebalancing) Nathan’s Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of r of r = 43%. Nathan’s rebalances its capital structure each year to a target of L = 0.52. T* = 0.20. Nathan’s can borrow currently at a rate of rd = 26%. What is Nathan’s WACC?

WACC = r - T* L rd [(1 + r) / (1 + rd)]

WACC = 0.43 - 0.20 x 0.52 x 0.26 [(1 + 0.43) / (1 + 0.26)] = 0.3993 = 39.93%

A-10 (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

D1 = ADJ [POR(EPS1) - D0] + D0

D1 = 0.75 [0.25 x $8.00 - $1.00] + $1.00 = $1.75

D2 = 0.75 [0.25 x $8.00 - $1.75] + $1.75 = $1.94

D3 = 0.75 [0.25 x $8.00 - $1.94] + $1.94 = $1.985

D4 = 0.75 [0.25 x $8.00 - $1.98] + $1.98 = $2.00

D5 = 0.75 [0.25 x $8.00 - $2.00] + $2.00 = $2.00

B-2 (Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share...

Please join StudyMode to read the full document