Question

16.3-16.6

16-3 16-4 Intermediate Problems 4-6 16-5 STOCK REPURCHASES Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding. The company's stock currently trades at $32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market. The repurchase is expected to have no effect on net income or its stock price. What will be Beta's EPS following the stock repurchase? STOCK SPLIT After a 5-for-1 stock split, Iskandar Company paid a dividend of $0.75 per new share, which represents a 9% increase over last year's pre-split dividend. What was last year's dividend per share? EXTERNAL EQUITY FINANCING Nazawa Heating and Cooling Company has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $10 million investment in plant and machinery. The firm wants to maintain a 40% debt level in its capital structure. It also wants to maintain its past dividend policy of distributing 45% of last year's net income. In 2012, net income was $5 million. How much external equity must Nazawa seek at the beginning of 2013 to expand capacity as desired? Assume that the firm uses only debt and common equity in its capital structure. RESIDUAL DIVIDEND MODEL Sunny Way Company is considering three inde pendent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk: Cost of capital -16% RR - 20% Project M (medium risk: Cost of capital -12% RR - 10% Project L (low risk: cost of capital = 8% RR -9% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of $7,287,500. If Sunny Way establishes its dividends from the residual dividend model, what will be its payout ratio? 16-6

Answer 1

16.3

Net Income = $20,00,000

Current number of shares = 10,00,000

shares to be repurchased = 20% of 10,00,000 = 2,00,000

Shares remianing = 10,00,000 - 2,00,000 = 8,00,000

EPS after stock repurchase = Net income/shares remaining post repurchase = 20,00,000/8,00,000 = $2.50 per share