4. Needham Inc. is a steel company that reported $ 100 million in net income in the just-completed financial year. The firm has a payout ratio of 30% and the dividends in the mostrecent year were exactly were exactly equal to the free cash flows to equity. The firm wasall equity financed.a. Assume that you expect Needham to maintain a growth rate of 10% a year in net incomeand reinvestment (net cap ex and change in working capital) for the next year and that youanticipate that the firm will fund 20% of its new investments (net cap ex and workingcapital) with debt. If you maintain the policy of paying out the entire free cash flow toequity as dividends, what payout ratio can the firm afford next year?b. Needham currently has a cash balance of $ 100 million. If Needham increases its payoutratio to 40% and buys back $ 50 million in new stock next year, estimate how much itscash balance will be at the end of next year. (You can use the net income, reinvestment anddebt numbers that you estimated in part a)

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Answered: 4. Needham Inc. is a steel company that…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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