EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 15, Problem 8P
a.
Summary Introduction
To determine: If $6 million investment projects having expected returns grater than 12%, then how much the total amount of dividend was paid by Company L.
b.
Summary Introduction
To determine: If $12 million investment projects having expected returns grater than 14%, then how much the total amount of dividend was paid by Company L.
c.
Summary Introduction
To determine: The residual theory of dividends and how the Company L will set its dividend.
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Tijuana Brass Instruments Company treats dividends as a residual decision. It expects to generate $2 million in net earnings after taxes in the coming year. The company has an all-equity capital structure, and its cost of equity capital is 15 percent. The company treats this cost as the opportunity cost of “internal” equity financing (retained earnings). Because of flotation costs and underpricing, “external” equity financing (new common stock) is not relied on until internal equity financing is exhausted.
1. How much in dividends (out of the $2 million in earnings) should be paid if the company has $1.5 million in projects whose expected returns exceed 15 percent?
2. How much in dividends should be paid if it has $2 million in projects whose expected returns exceed 15 percent?
Tijuana Brass Instruments Company treats dividends as a residual decision. It expects to generate $2 million in net earnings after taxes in the coming year. The company has an all-equity capital structure, and its cost of equity capital is 15 percent. The company treats this cost as the opportunity cost of “internal” equity financing (retained earnings). Because of flotation costs and underpricing, “external” equity financing (new common stock) is not relied on until internal equity financing is exhausted.
How much in dividends should be paid if it has $3 million in projects whose expected returns exceed 16 percent?
The Wagner Company tries to follow a pure "residual" dividend policy. Earnings and dividends last year were $100 million and $20 million respectively. Anticipated earnings for this year are $80 million. The company is financed completely with common equity. The required rate of return on retained earnings is 15 percent and the cost of new equity is 16 percent. If Wagner has $70 million of investment projects having expected returns greater than 15 percent, determine the total amount of dividends Wagner should pay.
Chapter 15 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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