Purchase Solution

Cost of Retained Earnings/WACC and Optimal Capital Budgeting

Not what you're looking for?

Ask Custom Question

XYZ company's investment budget and dividend payout plan for next year.

a. XYZ expects next year's income after-tax to be $28,000,000.
b. Earnings and dividends are growing at a constant rate of 10% per year.
c. Last year's dividends was $2.73,
d. Current stock price is $40.00
e. Cost of new debt is 12%
f. XYZ's optimal capital structure is 70% equity and 30% debt.
g. Marginal Tax rate is 40%
h. The following independent and equally risky investment opportunities are available.

Project Cost IRR
A $10,000,000 17%
B $5,000,000 15%
C $8,000,000 13%
D $7,000,000 16%
E $3,000,000 14%

Questions:

1. What is XYZ's cost of it's retained earnings?

2. What is the company's after-tax weighted average cost of capital?

3. What is the dollar amount of XYZ's optimal capital budget and which projects should be undertaken?

4.In terms of the "pure residual theory of dividends" (applied in the short run for only next year), how much (in dollars) should XYX's plan to pay out in dividends to it's share holders?

Purchase this Solution

Solution Summary

The cost of retained earnings/WACC and optimal capital budgeting is examined.

Solution Preview

Please see attachment.

XYZ Company's investment budget and dividend payout plan for next year.

a. XYZ expects next year's income after-tax to be $28,000,000.
b. Earnings and dividends are growing at a constant rate of 10% per year.
c. Last year's dividends was $2.73,
d. Current stock price is $40.00
e. Cost of new debt is 12%
f. XYZ's optimal capital structure is 70% equity and ...

Solution provided by:
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
Recent Feedback
  • "Thank you."
  • "thank you Chidi Ngene.. if you have any APA references would be great"
  • "Thank you so much for your help, your explanations were easy to understand and apply!"
  • "are you able to highlight the equations used either on the xlsx or a word doc as to how each graph was formed- overall looks fine i just need help understanding this myself"
  • "Chidi Ngene, M. Sc. Was extremely helpful as without the help and guidance I would have failed, but with the help I passed. I still have a lot to learn and in need of the guidance to understand and learn more on the subject. I would recommend Chidi Ngene and BrainMass to anyone that are in need of help. Thank you!!"
Purchase this Solution


Free BrainMass Quizzes
Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Motivation

This tests some key elements of major motivation theories.