Assignment
Problem 1: Comment on the following proposition: The use of floating-rate debt eliminates interest rate risk (the risk that interest payment amounts will change in the future) for both the borrower and the lender.
Problem 2: Beta Corporation has the following shareholders' equity accounts:
Common stock at par $ 5,000,000
Paid-in capital in excess of par 2,000,000
Retained earnings 25,000,000
$ 32,000,000
a. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U.S. state where capital is defined as the par value of common stock?
b. What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U.S. state where capital is defined s the par value of common stock, plus paid-in capital in excess of par?
Question 3: Delta Corporation earned $2.50 per share during fiscal year 2011 and paid cash dividends of $1.00 per share. During the fiscal year that just ended on December 31, 2012, Delta earned $3.00 per share, and the firm's managers expect to earn this amount per share during fiscal years 2013 and 2014, as well.
a. What was Delta's payout ratio for fiscal year 2011?
b. If Delta's managers want to follow a constant dollar payout dividend policy, what dividend per share will they declare for fiscal year 2012?
c. If Deltas's managers want to follow a constant payout ratio dividend policy, what dividend per share will they declare for fiscal year 2012?
d. If Delta's managers want to follow a partial-adjustment strategy, with a target payout ratio equal to fiscal year 2011's, how could they change dividend payments during 2012, 2013, and 2014?