Question

Kahn Inc. has a target capital structure of 70% common equity
and 30% debt to fund its $8 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt
of 11%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D_{1}) is $3, and
the current stock price is $28.

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

____% - If the firm's net income is expected to be $1.2 billion, what
portion of its net income is the firm expected to pay out as
dividends? (
*Hint*: Refer to Equation below.)

Growth rate = (1 - Payout ratio)ROE

Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations.

_______%

Answer #1

Solution:

Calculation of company's expected growth rate:

Firstly,we have to find out cost of equity(k)

we know that,WACC=**Cost of
equity*%equity**+**Cost of Debt*%debt(1-tax
rate)**

Therefore

0.14=k*0.70+0.11*30%(1-.40)

0.14=k*.70+0.0198

k=.1202/.70

=**17.17%**

**Now for calculation of growth rate**

P=D/(R-G)

Where,

P=current price of stock

D=Next year dividend

R=Company cost of equity

G=growth rate

Therefore

$28=$3/(0.1717-G)

.1717-G=b4$3/28

**G=.1717-.1071**

**=.0646**

**=6.46%**

**b)**Calculation of Payout ratio:

Shareholder's Equity=$8bn*70%

=5.6bn

Therefore,ROE=1.2bn/5.6bn

=21.42857%

Growth rate=(1-payout ratio)ROE

6.46%=(1-Payout ratio)21.42857%

Payout ratio=1-.3015

=.69853

**=69.85%**

Kahn Inc. has a target capital structure of 70% common equity
and 30% debt to fund its $8 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt
of 11%, and a tax rate of 40%. 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 $27.
What is the company's expected growth...

Kahn Inc. has a target capital structure of 70% common equity
and 30% debt to fund its $9 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt
of 9%, 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 $33.
1. What is the company's expected...

Kahn Inc. has a target capital structure of 55% common equity
and 45% debt to fund its $11 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt
of 12%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D1) is $2, and
the current stock price is $23.
What is the company's expected growth...

Kahn Inc. has a target capital structure of 55% common equity
and 45% debt to fund its $9 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt
of 10%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D1) is $2, and the current
stock price is $21. What is the company's expected growth...

Kahn Inc. has a target capital structure of 55% common equity
and 45% debt to fund its $9 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt
of 10%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D1) is $2, and
the current stock price is $21.
What is the company's expected growth...

Kahn Inc. has a target capital structure of 45% common equity
and 55% debt to fund its $10 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt
of 9%, and a tax rate of 40%. 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 $23. What is the company's expected growth...

Kahn Inc. has a target capital structure of 50% common equity
and 50% debt to fund its $12 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt
of 9%, and a tax rate of 40%. 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 $25.
What is the company's expected growth...

Kahn Inc. has a target capital structure of 45% common equity
and 55% debt to fund its $12 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt
of 8%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D1) is $2, and the current
stock price is $30.
a. What is the company's expected...

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...

Kahn Inc. has a target capital structure of 45% common equity
and 55% debt to fund its $8 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt
of 12%, 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 $29.
What is the company's expected growth...

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