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Medical Questions
Your Question
RESIDUAL DIVIDEND MODEL
Buena Terra Corp is reviewing its capital budget for upcoming year. It has piad $3 divident per share for past several years. The target capital structure is 60% equity and 40% debt; it has 1,000,000 shares of common equity outstanding; net income $8 million. Forecasts require $10 million to fund all positive NPV projects for the upcoming year.
a. if the follow the residual dividend model, how much retained earnings will be needed to fund capital budget?
b. following the residual dividend model, what will be the divident per share and payout ratio for upcoming year?
c. if they maintain $3 DPS for next year, how much retained earnings will be available for capital budget?
d. can the company maintina current capital structure, maintain the $3 DPS and maintain a $10 million capital budget without having to raise new common stock?
e. suppose management is opposed to cutting the difident; it wishes to maintain the $3 divident for the next year. They are also committed to funding all profitable projects and willing to insure more dept (along with availale retained earnings).capital budget remains at $10 million. What portion of the year's capital budget would have to be financed with debt?
f. management wants to maintain $3 DPS. In addition they want to maintain 60% equity and 40% det and $10 million capital budget. What is the min dollar mat of new common stock the company would have to issue in order to meet each of it's objectives?
g. what if they want to maintain $3 DPS and their target capital structure, but wants to avoid issuing new common stock. They are willing to cut capital budget to meet these objectives. Assuming projects are divisible, what will e the captial budget for the next year?
h. what actions can a firm that follows the residual dividend policy take when it's forecasted retained earning are less than retained earning required to fund capital budget?
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