--%>
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 : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Working Capital - Current Assets and

    I do not know the meaning of Working Capital Requirements. I think this should be same to Working Capital (Current Assets – Current Liabilities). There am I right?

    		•
  • Q : Problem on stock market John Wong is a

    John Wong is a fresh graduate and has a limited amount of funds for investments. He expects that the Hong Kong stock market will fall soon but he is not familiar with derivatives. In order to gain more money to buy a car, he explores engaging in Hang Seng Index (HSI)

    		•
  • Q : Tax benefits of lease FedEx would like

    FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for

    		•
  • Q : Is book value the excellent proxy to

    Is book value the excellent proxy to the value of the shares?

    		•
  • Q : Is it possible to use a constant WACC

    Is this possible to use a constant WACC in the valuation of a company along with a changing debt?

    		•
  • Q : Explain merits and demerits of standard

    Explain merits and demerits of standard market practice to find the volatility as a function of underlying.

    		•
  • Q : DCF Analysis AB Corp. is in the

    AB Corp. is in the business of making white-board markers. They are computing the potential of investing in some new equipment that will enhance their manufacturing process.  The initial cost of the latest machinery is $470,000 plus a one-time installation cost o

    		•
  • Q : Could we explain that goodwill is equal

    Could we explain that goodwill is equal to brand value?

    		•