# Fin 516 Week 1

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Fin 516 Week 1
FIN-516 WEEK 1 – HOMEWORK ASSIGNMENT

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?
NI Increased by 8%= \$15,000 * .08= \$16,200,000
Total dividends payout = \$3,000,000 * .08 = \$3,240,000 2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%?
\$3,240,000/\$16,200,000 = .20
The 2012 payout ratio is 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 Dividends Payout Ratio is: 52%

0.65 * \$12,000,000 = \$7,800,000
\$16,200,000 - \$7,800,000 = \$8,400,000
\$8,400,000 / \$16,200,000 = 0.52 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?
0.35 * \$12,000,000 = \$4,200,000
Additional capital is \$4,200,000 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.
Current Dividend growth rate

Problem 19-3 (Chapter 19) on Warrants
This problem is posted on page 781 of the textbook.
Problem 19-3
Maese Industries Inc. has

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