Question

Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 8%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $28.

A. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.

B. If the firm's net income is expected to be $1.3 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio)ROE

Answer 1

Answer:

From the given data

WACC==>12%

weight of equity==>0.5

after tax cost of debt==>8%

WACC==>(weight of debt)*(cost of debt after tax) + (weight of equity)*(cost of equity)

12% = 0.5 * 8% * (1-0.25) + 0.5 * Cost of Equity

then, we get that ROE==>18.00%

a)

Growth Rate ==> 0.18 - (3/28) ==> 0.0728 ==> 7.28%

b)

Given that Growth rate = (1 - Payout ratio)ROE

then we get that

Payout Ratio ==> 1 - GrowthRate/18%

==> 1 - (7.28% / 18%)

==> 1- (0.404444)

==> 0.5956

The firm expected to pay out as dividends is calculated below:

==> 1.3 Billion * 0.5956

==> 0.77428

==> 0.77 billion

------------------------------------------------