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a) Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual distribution model with all distributions as dividends, what will be its dividend payout ratio?

b) Gamma Medical's stock trades at $90 a share. The company is contemplating a 3 for 2 stock split. Assuming that the stock split will have no effect on the total market value of its equity, what will be the company's stock price following the stock split?

c) Northern Pacific Heating and Cooling Inc has a 6 month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10 million investment in plant an dmachinery. The firm wants to maintain a 40% debt-to-total-assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 45% of last years net income. In 2004, net income was $5 million. How much external equity must Northern Pacific seek at the beginning of 2005 to expand capacity as desired?

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The solution has three finance questions relating to dividend payout, stock split and external equity

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a) Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual distribution model with all distributions as dividends, what will be its dividend payout ratio?

The capital budget is 3,000,000. As per the target capital structure, the amount of debt will be 3,000,000X70%=2,100,000 and the amount of equity will be 900,000.
The net income is 2,000,000. Of this the equity ...

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