--%>
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 : What is a 3 x 1 Split What is a 3 x 1

    What is a 3 x 1 Split?

    		•
  • Q : Provide three examples of mutually

    provide three examples of mutually exclusive projects?

    		•
  • Q : Explain Value Chain Value Chain : The

    Value Chain: The value chain is a theory from business management that was first described and popularized Michel Porter in his 1985 best seller, Competitive Advantage: Creating and Sustaining Superior Performance.

  • Q : Price per share for Corporation For XYZ

    For XYZ Corporation debt-to-equity ratio, marginal tax rate, and dividend payout ratio are all of 40%. The cost of debt is 10%. Cambria contains 1 million shares of common stock, and $25 million in long-term bonds. Its dividend is $1 per share. Determine the EBIT and

    		•
  • Q : Company Valuation Project Hello, Need a

    Hello, Need a top-notch finance expert to complete a company valuation assignment for me for a class. Will attach details. Please inform me if you have your graduate level resource who is good with company valuations and executive summary writeup of the analysis please. English writing skills ar

    		•
  • Q : Is depreciation is the loss of value of

    Is the depreciation is the loss of value of fixed assets?

    		•
  • Q : Define reasonable things that a company

    There are four methods a company can utilize the money this generates: a) Buying other assets or companies; b) Reducing debt of it; c) Distribute this to shareholders, and d) Increasing cash holdings of it.

  • Q : Who published a book regarding

    Who published a book regarding option formula and risk neutrality?

    		•
  • Q : Explain useful properties of

    Explain useful properties of low-discrepancy sequence theory or quasi random number theory.

    		•
  • Q : Explain company creates value for its

    Is this true that a company creates value for its shareholders in a year when this distributes dividends or when the quotation of the shares increases?

    		•