Chapter 14, Residual Dividends

WEEK 1 HOMEWORK ASSIGNMENT

JULY 15, 2010

Chapter 14, Residual Dividends

1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?

Net Income increased by 8 percent: $15,000,000 * 0.08= $16,200,000

Total dividends payout in Dollars: $3,000,000 * 0.08= $3,240,000

2. What is the 2012 dividend payout ratio if the company increases its dividends at 8%? The 2012 payout ratio is $3,240,000/16,200,000= 0.20%

3. If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividends payout ratio?

Residual Dividends Payout level in (Dollars) :

(0.65)($12,000,000)=$7,800,000

$16,200,000- $7,800,000= $8,400,000

The Residual Dividends payout ratio:

$8,400,000/$16,200,000= 0.52%

4. How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy? (0.35)($12,000,000)= $4,200,000

Or $12,000,000 -$7,800,000= $4,200,000

5. What would be the prudent dividend policy for 2012? Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount. Pay the current dividend growth rate of 8%.

Problem 19-3 on Warrants

A)

1. $20 25 0

2. $25 25 25

3. $30 25 5

4. $100 25 75

B) The stock are at $20 share, and the bond will have 50 warrants. The value of each warrant is worth $3 current time