--%>
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 : Which method must use to valuate young

    Which method must we use to valuate young companies along with high growth but uncertain futures? Two illustrations were Boston Chicken and Telepizza while they began.

    		•
  • Q : How much confidence can an investor

    I heard conversation of the Earnings Yield Gap ratio, that is the difference among the inverse of the PER and the TIR on 10-year-bonds. This is said that if this ratio is positive then this is more advantageous to invest in equity. How much confidence can an investor

    		•
  • Q : Is the price of futures the excellent

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

    		•
  • Q : What is the Free Cash Flow Is the Free

    Is the Free Cash Flow (FCF) the sum of the debt cash flow and the equity cash flow?

    		•
  • Q : What is Project Budget Project Budget :

    Project Budget: Collecting all costs related with completing a project is budget process. The Project Management Institute states that "aggregating the predictable costs of individual actions or work projects (establishing) an authorized cost baseline

    		•
  • Q : Shall we use the arithmetic mean or the

    The market risk premium is the difference between the historical return on the stock market and the return on bonds. But how many years does “historical” imply? Shall we use the arithmetic mean or the geometric one?

    		•
  • Q : Explain the model of Heath Explain the

    Explain the model of Heath, Jarrow and Morton regarding tree building or Monte Carlo simulation.

    		•
  • Q : Bank assignment You have just been

    You have just been hired as the branch manager for a big bank in XYZ. You were told that the bank is going to open a new branch at Island Learning Centre of the Open University of XYZ. The management of the bank is much concerned that the new branch might not be able

    		•
  • Q : What did better mean specified by

    What did ‘better’ mean specified with Markowitz questioned regarding portfolio selection?

    		•
  • Q : Problem on maintaining dividend Jackson

    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 millio

    		•