Fin 516 Week 1 Homework

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Ashley Scott – Week ONE Homework
Problem Based on Chapter 14, Residual Dividends
1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars? 3,000,000 x (1 + .08)
3,000,000 x 1.08 = $3,240,000

2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%? Net income increased by 8% would be 15,000,000 x (1 + .08) = 15,000,000 x 1.08 = 16,200,000 Dividend Payout = 3,240,000 / 16,200,000 = .2 = 20%

3. If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividends payout ratio? Net Income in 2012 = 16,200,000

Capital Budget = .65 x 12,000,000 = 7,800,000
Residual Dividend level = 16,200,000 – 7,800,000 = 8,400,000 Residual Dividends payout ratio = 8,400,000 / 16,200,000 = .52 = 52%

4. How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy? The company will have to raise at least $42,000,000 if it invests in this capital project. 35% debt level x 12,000,000 capital budget = $42,000,000.

5. What would be the prudent dividend policy for 2012?: Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount. Pay the residual dividend amount to remain stable and flexible in the future for dividends. Problem 19-3 (Chapter 19) on Warrants
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