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# Payout stock price, calculate ratios, growth rate, merger

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8. Cash Dividends. The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will
be \$0.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance
sheet for Payout is shown on the following table.
Assets Liabilities and Equity
Cash \$100,000 Equity \$1,000,000
Fixed Assets \$900,000

a. What price is Payout stock selling for today?
b. What price will it sell for tomorrow? Ignore taxes.

4. Growth Rates. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.40; profit margin = 5 percent; payout ratio = 25 percent; equity/assets =
.60.

11. Feasible Growth Rates. What is the maximum possible growth rate for Planners Peanuts (see Problem 9) if the payout ratio remains at 50 percent and

a. no external debt or equity is to be issued.
b. the firm maintains a fixed debt ratio but issues no equity.

13. Feasible Growth Rates.

a. What is the internal growth rate of Eagle Sports (see Problem 12) if the dividend payout ratio is fixed at 70 percent and the equity-to-asset ratio is fixed at 2&#8260;3?
b. What is the sustainable growth rate?

20. Sustainable Growth. A firm's profit margin is 10 percent, and its asset turnover ratio is .6. It
has no debt, has net income of \$10 per share, and pays dividends of \$4 per share. What is the
sustainable growth rate?

5. Merger Facts. True or false?

a. One of the first tasks of an LBO's financial manager is to pay down debt.
b. The cost of a merger is affected by the size of the merger gains when the merger is financed with cash.
c. Targets for LBOs in the 1980s tended to be profitable companies in mature industries with limited investment opportunities.

#### Solution Preview

8. Cash Dividends. The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will
be \$0.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance
sheet for Payout is shown on the following table.
Assets Liabilities and Equity
Cash \$100,000 Equity \$1,000,000
Fixed Assets \$900,000

a. What price is Payout stock selling for today?

Total Equity/# of stock outstanding = 1,000,000/20,000 = \$50

b. What price will it sell for tomorrow? Ignore taxes.

\$50 - \$0.50 = \$49.50

4. Growth Rates. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.40; profit margin = 5 percent; payout ratio = 25 percent; equity/assets =
.60.

Return on equity = (Net Profit Margin) x (Asset Turnover) x (Equity Multiplier)
= 5% x 1.4 x 0.60
= 4.20%

Expected Dividend Growth Rate = Return on Equity * (1 - Payout Ratio)
= 0.042 x (1 - 0.25)
= 3.15%

11. Feasible Growth Rates. What is the maximum possible growth rate for Planners Peanuts (see Problem 9 below) if the payout ratio remains at 50 percent and

a. no external debt or equity is ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer what price is Payout stock selling for today, what price will it sell for tomorrow, find the sustainable and internal growth rates for a firm, find what is the maximum possible growth rate for Planners Peanuts if the payout ratio remains at 50 percent and no external debt or equity is to be issued and if the firm maintains a fixed debt ratio but issues no equity, what is the internal growth rate of Eagle Sports if the dividend payout ratio is fixed at 70 percent and what is the sustainable growth rate, and determine Merger Facts.

\$2.19