Problem Based on Chapter 14, Residual Dividends
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. 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 *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 percent would be 15,000,000*1.08=16,200,000 Payout ratio = 3,240,000/16,200,000=.2
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? .65*12,000,000=7,800,000
Residual Dividend level= $8,400,000
Residual Dividends payout ratio=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? .35*12,000,000= 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 dividends at the current dividend growth rate
Problem 19-3 (Chapter 19) on Warrants
This problem is posted on page 781 of the textbook.
Maese Industries Inc. has warrants outstanding that permit...