Question 1: Puckett Products is planning for a $5 million in capital expenditures next year. Puckett's target capital structure consists of 60% debt and 40% equity. If net income next year is $3 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio?
Question 2: A firm has $10 million shares outstanding with a market price of $20 per share. The firm has $25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations, and how many shares will remain after purchase?
Question 3: JPix management is considering a stock split. JPix currently sells for $120 per share and a 3-for-2 stock split is contemplated. What will be the company's stock price following the stock split, assuming that the split has no effect on the total market value of JPix's equity?
Question 4: Gardial GreenLights, a manufacturer of energy-efficient lighting solutions, has had such success with its new products that it is planning to substantially expand its manufacturing capacity with a $15 million investment in new machinery. Gardial plans to maintain its current 30% debt-to-total-assets ratio for its capital structure and to maintain its dividend policy in which at the end of each year it distributes 55% of the year's net income. This year's net income was $8 million. How much external equity must Gardial seek now to expand as planned?
Question 5: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to 12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.
A) Calculate Boehm's total dividends or 2014 under each of the following policies:
- Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.
- It continues the 2013 dividend payout ratio.
- It uses a pure residual policy with all distributions in a form of dividends (35% of the $7.3 million investment is financed with debt).
- It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.
B) Which of the preceding policies would you recommend? Restrict your choices to the ones listed, but justify your answer.
C) Does a 2014 dividend of $9 million seem reasonable in view of your answers to part a and b? If not, should the dividend be higher or lower?