Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 11%, 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 $3, and the current stock price is $33.
What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.
If the firm's net income is expected to be $1.3 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
a). WACC = [wD * kD * (1 - t)] + [wE * kE]
14% = [0.55 * 11% * (1 - 0.25)] + [0.45 * kE]
14% = 4.5375% + [0.45 * kE]
0.45 * kE = 14% - 4.5375%
kE = 9.4625% / 0.45 = 21.03%
P0 = D1 / [r - g]
$33 = $3 / [0.2103 - g]
0.2103 - g = $3 / $33
g = 0.2103 - 0.0909 = 0.1194, or 11.94%
b). g = ROE * (1 - Payout Ratio)
0.1194 = [Net Income / Common Equity] * [1 - Payout Ratio]
0.1194 = [$1,300,000,000 / (0.45 * $11,000,000,000)] * [1 - Payout Ratio]
0.1194 = 0.2626 * [1 - Payout Ratio]
1 - Payout Ratio = 0.1194 / 0.2626
Payout Ratio = 1 - 0.4545 = 0.5455, or 54.55%
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund...
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 10%, 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 $4, and the current stock price is $32. What is the company's expected growth...
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 10%, 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 $4, and the current stock price is $32. What is the company's expected growth...
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Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, 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 $4, and the current stock price is $34. a. What is the company's expected...
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Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 12%, 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 $3, and the current stock price is $33. a. What is the company's expected...
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