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Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth

A case study on dividend policies and financial strategies used by Keenan Company in 2012.

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 1Dividend Policies and Financial Strategies: A Case Study on KeenanCompany's 2012 Dividends and Future Growth1.Residual dividend modelAxel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. Thecompanyanticipates that its capital budget for the upcoming year will be $2,000,000. If Axel reports netincome of $700,000 and it follows a residual dividend payout policy, what will be its dividend payout ratio?Round your answer to two decimal places.________%To determine thedividend payout ratiounder theresidual dividend model, follow these steps:Step 1: Calculate the equity portion of the capital budgetAxel Telecommunications follows a target capital structure of70% debt and 30% equity. Given that thetotal capital budget is$2,000,000, the portion financed by equity is:Equityportion=30%×2,000,000=0.30×2,000,000=600,000Step 2: Determine residual earnings available for dividendsThe company's net income is$700,000, and it needs to retain$600,000for reinvestment. The remainingamount available for dividends is:Dividends=NetIncome−Equityportionofcapitalbudget\text{Dividends} =\text{Net Income}-\text{Equityportion of capital budget}Dividends=NetIncome−EquityportionofcapitalbudgetDividends=700,000−600,000=100,000\text{Dividends} = 700,000-600,000 =100,000Dividends=700,000−600,000=100,000Step 3: Calculate the dividend payout ratioThedividend payout ratiois calculated as:Final Answer:14.29%2.Problem 15-2Stock splitGamma Medical's stock trades at $145 a share. The company is contemplating a 3-for-2 stock split.Assuming that the stock split will have no effect on the market value of its equity, what will be the company's

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 2

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 3stock price following the stock split? Round your answer to the nearest cent.$________3.Problem 15-3Stock repurchasesBeta Industries has net income of $3,800,000, and it has 870,000 shares of common stock outstanding. Thecompany's stock currently trades at $70 a share. Beta is considering a plan in which it will use availablecash to repurchase 15% of its shares in the open market. The repurchase is expected to have no effect onnet income or the company's P/E ratio. What will be its stock price following the stock repurchase? Roundyour answer to two decimal places.$________

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 44.Problem 15-4Stock splitAfter a 5-for-1 stock split, Strasburg Company paid a dividend of $1.35 per new share, which represents a13% increase over last year's pre-split dividend. What was last year's dividend per share? Round youranswer to the nearest cent.$________

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 5To determine last year's dividend per share, we can use the following steps:Step 1: Identify the Post-Split DividendThe post-split dividend is given as $1.35 per new share.Step 2: Understand the Stock SplitSince it is a 5-for-1stock split, each old share is converted into 5 new shares. Therefore, the dividend perold share will be 1/5 of the new dividend per share.5.Problem 15-5External equity financingNorthern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heatingsystem. To meet this demand, management plans to expand production capacity by 25% with a $5 millioninvestment in plant and machinery. The firm wants to maintain a 55% debt-to-total-assets ratio in its capitalstructure. It also wants to maintain its past dividend policy of distributing 60% of last year's net income. In2012, net income was $5 million. How much external equity must Northern Pacific seekat the beginning of2013 to expand capacity as desired? Assume the firm uses only debt and common equity in its capitalstructure. Write out your answer completely. For example, 25 million should be entered as 25,000,000.Round your answer to the nearest cent.$________To calculate how much external equity Northern Pacific Heating and Cooling Inc. must seek, we will breakthe problem down into several steps.Step 1: Determine the totalfinancing neededThe company needs $5 million to expand its production capacity.Step 2: Determine the amount of debt needed

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    Dividend Policies and Financial Strategies: A Case Study on Keenan Company's 2012 Dividends and Future Growth, page 6The company wants to maintain a 55% debt-to-total-assets ratio. So, the debt portion will be 55% of thetotal investment.6.Problem 15-6Residual dividend modelWelch Company is considering three independent projects, each of which requires a $5 million investment.The estimated internal rate of return (IRR) and cost of capital for these projects ispresented below:Project H (High risk):Cost of capital = 16%IRR = 22%Project M (Medium risk):Cost of capital = 14%IRR = 11%Project L (Low risk):Cost of capital = 8%IRR = 10%Note that the projects' costs of capital vary because theprojects have different levels of risk. The company'soptimal capital structure calls for 50% debt and 50% common equity, and it expects to have net income of$8,662,000. If Welch establishes its dividends from the residual dividend model, what will be its payoutratio? Round your answer to two decimal places.

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