Austin Manufacturing is considering three independent projec…
Austin Manufacturing is considering three independent projects that each require an initial investment of $1.50 million. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project 1: cost of capital = 13%, IRR = 16% Project 2: cost of capital = 10%, IRR = 11% Project 3: cost of capital = 16%, IRR = 20% Assume that Austin Manufacturing only pursues positive net present value projects. The company’s optimal capital structure calls for 45% equity. Austin expects to have net income of $3,000,000. a. If Austin establishes its dividend from the residual dividend model, what will be its payout ratio? b. What would be the payout ratio if net income were only $2,250,000?
Read DetailsAnderson Aeronautics will report a 2015 Net Income of $1,400…
Anderson Aeronautics will report a 2015 Net Income of $1,400,000 Prior to reporting this net income (and the rest of their income statement), the company wants to determine its annual dividend. The company has 125,000 shares of common stock outstanding, and its stock trades at $28 per share. The company had a 60% payout ratio in 2014. a. If Anderson wants to maintain its 2014 payout ratio in 2015, what will be its per-share dividend in 2015? b. The company reported net income of $1,800,000 million in 2014. Assume that the number of shares outstanding has remained constant. What was the company’s per-share dividend in 2014? c. As an alternative to maintaining the same dividend payout ratio, Anderson is considering maintaining the same per-share dividend in 2015 that it paid in 2014. If it chooses this policy, what will be the company’s dividend payout ratio in 2015? d. Which strategy, maintaining a constant dividend payout ratio or maintaining the same per-share dividend, will lead to higher retained earnings for the firm in 2015? e. Assuming the firm can utilize the additional retained earnings to fund future investments, is the strategy in d advisable and why?
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