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# Dividend Payout Ratio, Value of Operations, Stock Split & External Equity

1) Peterson company has a capital budget of \$1.2 million. The company wants to maintain a target capital structure which is 60% debt and 40% equity. The company forecasts that its net income this year will be \$600,000. If the company follows a residual distribution model and pays all distributions as dividends, what will be it's payout ratio?

2) the Wei corporation expects next years net income to be \$15 million. The firm's debt ratio is currently 40%. Wei has \$12 million of profitable investment opportunities, and it wishes to maintain it's existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wei's dividend payout ration be next year.

3) A firm has 10 million shares outstanding with a market price of \$20 per share. The firm has \$25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations, and how many shares will remain after the purchase?

4) Suppose you own 2,000 common shares of Laurance Incorporated. The EPS is \$10.00, the DPS is \$3,000, and the stock sells for \$80 per share. Laurance announces a 2-for-1 split. Immediately after the split, how many shares will you have, what will the adjusted EPS and DPS be, and what would you expect the stock price be?

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1) Peterson company has a capital budget of \$1.2 million. The company wants to maintain a target capital structure which is 60% debt and 40% equity. The company forecasts that its net income this year will be \$600,000. If the company follows a residual distribution model and pays all distributions as dividends, what will be it's payout ratio?

Capital Budget = \$1,200,000
Retained earnings = Equity portion of capital budget = 40%*\$1,200,000=\$480,000
Net income = \$600,000
Dividend payout = Net income - retained earnings = \$600,000-\$480,000=\$120,000
Dividend payout ratio = Dividend payout / Net income = \$120,000 / \$600,000=0.20 or 20%

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#### Solution Summary

The problems are solved concisely with all calculations displayed.

\$2.19