Submitted by: Submitted by didemt
Views: 389
Words: 484
Pages: 2
Category: Business and Industry
Date Submitted: 05/09/2011 10:34 AM
Introduction
This firm is determined to maintain its capital structure and increase the dividend payments in the next two years. FuzzyTronic has to find a way to keep its optimal capital budget and also invest on a very promising automotive transmission project. The company’s weighted debt investment is relatively small compared to common equity weight. The company has started to pay dividends for the investors who patiently waited for FuzzyTronic to grow in the past. Decreasing the dividend payments after a payment in 1992 or stopping the dividend payments would cause a negative signal to the market which would decrease the firm’s market value. FuzzyTronic relies heavily on common equity investment. This would cause FuzzyTronic to start having difficulties in getting investments it needs to grow further. Still the transmission project is needed for the company and FuzzyTronic must find a way to pay the dividends and invest in the project at the same time.
Questions&Answers
1. The optimal capital structure can be calculated with the help of Table 2. The investments are long term debt, retained earnings and common stock. We cannot include short term debt into the capital structure because it is more related to operating costs. For year 1992:
The long term debt is $55.000. The Common Equity is $ 1.000.000. On a percentage basis, the Common Equity is 94,79 %. From the bottom of Table 3, we get the after tax cost of debt and the cost of common equity. From the formula WACC = rD (1- Tc )*( D / V )+ rE *( E / V ) = 13,6 %
2. The total dividend expense for the next four years can be calculated by multiplying the number of shares outstanding and dividends paid per share.
year 1992 1993 1994 1995 1996
shares outstanding 150000 150000 150000 150000 150000
dividends per share ($) 0,9 1 1,25 1,5 1,57
dividend expense ($) 135000 150000 187500 225000 235500
3. For the short term, the boost in the dividend payments can be paid from the retained earnings of...