Fin516 Homework Week 1

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FIN-516 WEEK 1 – HOMEWORK ASSIGNMENT
Steven Kelley 5/8/13

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.

Given Information:|
Net Income 2011 - $15,000,000|  |  |
Net Income (increased by 8%) = $16,200,000|
Target Equity Ratio 2012 = 65%| |  |
Dividend Payout 2011 = 3,000,000|  |
Capital Budget = $12,000,000|  |  |

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?

If Net income increases by 8% and Dividends also increases by the same rate: 2011 Dividends = $3,000,000
2012 Dividends = $3,000,000 x 1.08
2012 Dividends = $3,240,000

2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%?

Net Income for 2012 = $16,200,000
Dividend Payout for 2012 = $3,240,000
Dividend Payout Ratio = Dividend Payout / Net Income
Dividend Payout Ratio = 3,240,000 / 16,200,000
Dividend Payout Ratio = 0.20 or 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?

Residual Dividend Payout = Net Income – (Target Equity Ratio x Total Capital Budget)
Residual Dividend Payout (in $) = 16,200,000 – (0.65 x 12,000,000)
Residual Dividend Payout (in $) = 16,200,000 – 7,800,000
Residual Dividend Payout...
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