Question

Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that...

Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $7 million to fund all of its positive-NPV projects, and her job is to determine how to raise the money. Reynolds's net income is $7 million, and it has paid a $3.00 dividend per share (DPS) for the past several years (1.5 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company's target capital structure is 35% debt and 65% equity.

Suppose Reynolds follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital budget? Round your answer to the nearest dollar.
$   

If Reynolds follows the residual model with all distributions in the form of dividends, what will be its dividend per share? Round your answer to the nearest cent.
$   

What will be payout ratio for the upcoming year? Round your answer to two decimal places.
     %

If Reynolds maintains its current $3.00 DPS for next year, how much retained earnings will be available for the firm's capital budget? Round your answer to the nearest dollar.
$   

Suppose that Reynolds's management is firmly opposed to cutting the dividend; that is, it wishes to maintain the $3.00 dividend for the next year. Suppose also that the company is committed to funding all profitable projects and is willing to issue more debt (along with the available retained earnings) to help finance the company's capital budget. Assume the resulting change in capital structure has a minimal impact on the company's composite cost of capital, so that the capital budget remains at $7 million. What portion of this year's capital budget would have to be financed with debt? Round your answer to two decimal places.
     %

Suppose once again that Reynolds's management wants to maintain the $3.00 DPS. In addition, the company wants to maintain its target capital structure (35% debt, 65% equity), and its $7 million capital budget. What is the minimum dollar amount of new common stock the company would have to issue in order to meet all of its objectives? Round your answer to the nearest dollar.
$   

Now consider the case in which Reynolds's management wants to maintain the $3.00 DPS and its target capital structure but also wants to avoid issuing new common stock. The company is willing to cut its capital budget in order to meet its other objectives. Assuming the company's projects are divisible, what will be the company's capital budget for the next year? Round your answer to the nearest dollar.
$   

Homework Answers

Answer #1

a. Since the total capital funds needed is 7,000,000 and 65% is through equity, it needs 0.65*7,000,000 = 4,550,000

Retained earnings needed to fund its capital budget = 4,550,000

b. Dividend per share in that case would be = 7,000,000/1,500,000 = $4.67/share

c. Payout ratio in the coming year = 3/4.67= 0.6429 = 64.29%

d. Total diviends to be paid = 3*1,500,000 = 4,500,000

Available retained earnings for the capital budget = 7,000,000 -4,500,000 = $2,500,000

Note: We have answered 4 sub-parts of the question. Kindly post the others seperately as only 4 sub-parts of a question can be answered at a time

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