Company is reviewing its capital finances for the upcoming 12 months. It has paid a $three.00 dividend per share (DPS) for the previous a number of years, and its shareholders count on the dividend to stay fixed for the following a number of years. The corporate’s goal capital construction is 60 p.c fairness and 40 p.c debt; it has 1,00zero,00zero shares of widespread fairness excellent; and its internet earnings is $eight million. The corporate forecasts that it could require $10 million to fund all of its worthwhile (that’s, constructive NPV) tasks for the upcoming 12 months.
a. If Buena Terra follows the residual dividend mannequin, how a lot retained earnings will it have to fund its capital finances?
b. If Buena Terra follows the residual dividend mannequin, what would be the firm’s dividend per share and payout ratio for the upcoming 12 months?
c. If Buena Terra maintains its present $three.00 DPS for subsequent 12 months, how a lot retained earnings will likely be out there for the agency’s capital finances?
e. Suppose that Buena Terra’s administration is firmly against reducing the dividend; that’s, it needs to keep up the $three.00 dividend for the following 12 months. Additionally, assume that the corporate was dedicated to funding all worthwhile tasks and was keen to situation extra debt (together with the out there retained earnings) to assist finance the corporate’s capital finances. Assume that the ensuing change in capital construction has a minimal affect on the corporate’s composite value of capital, in order that the capital finances stays at $10 million. What portion of this 12 months’s capital finances must be financed with debt?
f. Suppose as soon as once more that Buena Terra’s administration needs to keep up the $three.00 DPS. As well as, the corporate needs to keep up its goal capital construction (60 p.c fairness and 40 p.c debt) and preserve its $10 million capital finances. What’s the minimal greenback quantity of latest widespread inventory that the corporate must situation with a purpose to meet every of its targets?
g. Now think about the case the place Buena Terra’s administration needs to keep up the $three.00 DPS and its goal capital construction, however it needs to keep away from issuing new widespread inventory. The corporate is keen to chop its capital finances with a purpose to meet its different targets. Assuming that the corporate’s tasks are divisible, what would be the firm’s capital finances for the following 12 months?