Their planned capital budget for the upcoming year is $100.5 million. Their forecasted net income is $150.0 million. The firm has $50.0 million in short-term investments. The firm’s value of operations is $1,937.5 million. The firm carries $242.2 million in debt, and has no preferred stock. There are 100 million shares outstanding.
Calculate, based on the existing capital structure of 87.5 percent equity, how much equity and debt must be raised to finance the planned capital budget.
a. Use the residual distribution approach to determine how much should be paid out as dividends to new shareholders.
b. What would be the new payout ratio, and what would be the dividend per share amount?