Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 8%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $28.
What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.
10.86 %
If the firm's net income is expected to be $1.8 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.)
Growth rate = (1 - Payout ratio)ROE
%
growth rate = 10.86%
WACC = weight of debt * after tax cost of debt + weight of equity * cost of equity
=>
12% = 0.5 * 8% * (1-0.25) + 0.5 * ROE
=>
ROE = 18%
payout ratio = 1 - growth rate/ROE
= 1 - 10.86%/18%
= 0.39666666666
expected payout as dividend
= 1.8 billion * 0.39666666666
= 0.71 billion
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