--%>
Assignment Help - homework help

Problem on maintaining dividend

Jackson Company has 6 million shares of common stock selling at $55 each. It also has $120 million in long-term bonds with coupon 7%, selling at 90. The tax rate of Jackson is 33%. Next year its EBIT is expected to be $25 million with a standard deviation of $7 million. The company plans to continue its $1.60 dividend per share. Jackson also wants to add $4 million to its total retained earnings next year. Find the probability that it will be able to maintain its dividend.

E

Expert

Verified

Dividend to be paid = $1.6*6 million = $9.6 million

Dividend requirement = $9.6 million/(1 – 0.33) = $14.33 million

Retained earnings needed = $4 million

Retained earnings requirement = $4 million/(1 – 0.4) = $5.97 million

Interest expense requirement = $120 million*0.07 = $8.4 million

Total requirement = $28.7 million

In order to determine the probability,

Z = (28.7 – 25)/7 = 0.5284
P(z) = 70.14%

This is the probability that Jackson will default in its payment and hence the probability that it will be able to maintain its dividend is 29.86%

   Related Questions in Corporate Finance

  • Q : Define stock variable Stock variable :

    Stock variable: It is a variable whose value is measured or evaluated at a point of time.

    		•
  • Q : How you can predict future evolution of

    Could we suppose that, as we cannot predict the future evolution of the value of shares, a good estimation would be to consider this constant during the next five years?

    		•
  • Q : Problem on HIBOR Below are the

    Below are the three-month HIBOR and three-year EFN futures (that is, Exchange Fund Note) prices for the September 2010 contracts.a) Find out the HIBOR in three-months for settling the future contract utilizing the quotation on August 16.

    Q : Calculating Beta when market

    A company with a market capitalization of $100 million has no debt and a beta of 0.8. What will its beta be after it borrows $50 million (giving that there are no other changes and no taxes)?

    		•
  • Q : Explain value of shares is Is this

    Is this correct that the value of the shares is, the “value of the results’ capitalization” that, as per to the Institute of Accounting and Auditing (ICAC) shows “the sum of the expected future results of the company throughout a certain period

    		•
  • Q : Public Finance which type of tax,

    which type of tax, direct or indirect is applicable in underdeveloped countries? Why? Show your critical areas and weaknesses.

    		•
  • Q : Broad research methodologies Various

    Various broad research methodologies are available with which to study the development of accounting theory. a. Discuss the deductive, inductive, normative, and empirical research methods.  

  • Q : Problem on annual lease payments Taurus

    Taurus Corporation needs a computer, which it can buy for $100,000. Taurus will depreciate the computer uniformly over its useful life of 5 years. An investment tax credit of 7% is also available, and the computer will have no residual value. Taurus plans to borrow th

    		•
  • Q : Briefly describe the financial services

    1 FINANCIAL SERVICES BY BANKS Financial system facilitates the transformation of savings of individuals, government as well as business into investment and consumption. It consists of

    		•
  • Q : Is the price of futures the excellent

    Is the price of futures the excellent estimate of €/$ exchange rate?

    		•