Finance – target capital structure

1. Fidelity company has a target capital structure that

consists of 40 percent debt and 60 percent equity. The company’s capital budget

for next year is $10 million. Axel expects net income of $8 million. The

company’s cost of capital is 12 percent.

a. How much will the company pay out in dividends if it

follows a residual dividend policy?

b. What is the company’s dividend payout ratio if it pays

the dividends calculated above?

c. Is it likely the company will follow a residual dividend

policy? Why or why not?

d. If the company decided to pay out $4.5 million in

dividends, how much would it need to raise in equity outside the company?

e. Should the company go ahead with a project of average

risk that generates a 10 percent rate of return? Why or why not?

2. Ladle Corporation entered into an agreement with its

investment banker to sell 15 million shares of the company’s stock with Ladle

netting $270 million dollars from the offering. The expected price to the

public was $20 per share.

The out-of-pocket expenses incurred by the investment banker

were $5,000,000.

a. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $25 per share?

b. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $15 per share?

If the investment banker agrees to handle the issue on a

best efforts basis, earning 7.5 percent of the proceeds, calculate the

investment banker’s profit or loss if all 15 million shares are sold at an

average price of $15. How much will the company receive?

Finance – target capital structure

1. Fidelity company has a target capital structure that

consists of 40 percent debt and 60 percent equity. The company’s capital budget

for next year is $10 million. Axel expects net income of $8 million. The

company’s cost of capital is 12 percent.

a. How much will the company pay out in dividends if it

follows a residual dividend policy?

b. What is the company’s dividend payout ratio if it pays

the dividends calculated above?

c. Is it likely the company will follow a residual dividend

policy? Why or why not?

d. If the company decided to pay out $4.5 million in

dividends, how much would it need to raise in equity outside the company?

e. Should the company go ahead with a project of average

risk that generates a 10 percent rate of return? Why or why not?

2. Ladle Corporation entered into an agreement with its

investment banker to sell 15 million shares of the company’s stock with Ladle

netting $270 million dollars from the offering. The expected price to the

public was $20 per share.

The out-of-pocket expenses incurred by the investment banker

were $5,000,000.

a. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $25 per share?

b. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $15 per share?

If the investment banker agrees to handle the issue on a

best efforts basis, earning 7.5 percent of the proceeds, calculate the

investment banker’s profit or loss if all 15 million shares are sold at an

average price of $15. How much will the company receive?

Finance – target capital structure

1. Fidelity company has a target capital structure that

consists of 40 percent debt and 60 percent equity. The company’s capital budget

for next year is $10 million. Axel expects net income of $8 million. The

company’s cost of capital is 12 percent.

a. How much will the company pay out in dividends if it

follows a residual dividend policy?

b. What is the company’s dividend payout ratio if it pays

the dividends calculated above?

c. Is it likely the company will follow a residual dividend

policy? Why or why not?

d. If the company decided to pay out $4.5 million in

dividends, how much would it need to raise in equity outside the company?

e. Should the company go ahead with a project of average

risk that generates a 10 percent rate of return? Why or why not?

2. Ladle Corporation entered into an agreement with its

investment banker to sell 15 million shares of the company’s stock with Ladle

netting $270 million dollars from the offering. The expected price to the

public was $20 per share.

The out-of-pocket expenses incurred by the investment banker

were $5,000,000.

a. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $25 per share?

b. What profit or loss would the investment banker incur if

the issue were sold to the public at an average price of $15 per share?

If the investment banker agrees to handle the issue on a

best efforts basis, earning 7.5 percent of the proceeds, calculate the

investment banker’s profit or loss if all 15 million shares are sold at an

average price of $15. How much will the company receive?

1. Fidelity company has a target capital structure that

consists of 40 percent debt and 60 percent equity. The company’s capital budget

for next year is $10 million. Axel expects net income of $8 million. The

company’s cost of capital is 12 percent.

follows a residual dividend policy?

b. What is the company’s dividend payout ratio if it pays

the dividends calculated above?

c. Is it likely the company will follow a residual dividend

policy? Why or why not?

dividends, how much would it need to raise in equity outside the company?

risk that generates a 10 percent rate of return? Why or why not?

investment banker to sell 15 million shares of the company’s stock with Ladle

netting $270 million dollars from the offering. The expected price to the

public was $20 per share.

The out-of-pocket expenses incurred by the investment banker

were $5,000,000.

the issue were sold to the public at an average price of $25 per share?

the issue were sold to the public at an average price of $15 per share?

best efforts basis, earning 7.5 percent of the proceeds, calculate the

investment banker’s profit or loss if all 15 million shares are sold at an

average price of $15. How much will the company receive?