Question

Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $9 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 16%, 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 $4, and the current stock price is $29. 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 $1.8 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

after tax debt = before tax debt*(1-tax rate) = 10*(1-0.4)=6%

Total Capital value = Value of Equity + Value of Debt

=0.4+0.6

=1

Weight of Equity = Value of Equity/Total Capital Value

= 0.4/1

=0.4

Weight of Debt = Value of Debt/Total Capital Value

= 0.6/1

=0.6

After tax Cost of Capital = Weight of Equity*After tax Cost of Equity+Weight of Debt*After tax Cost of Debt

16 = After tax Cost of Equity*0.4+6*0.6

After tax Cost of Equity = 31

As per DDM

Price = Dividend in 1 year/(cost of equity - growth rate)

29 = 4/ (0.31 - Growth rate)

Growth rate% = 17.21

ROE = net income /equity

= net income/(weight of common equity*operating assets)

=1.8/(0.4*9)=50%

Growth rate=ROE*(1-payout ratio)

17.21=50*(1-Payout ratio)

Payout ratio = 0.66