Reference no: EM132798264
Question - Small town Diners has a policy of treating dividends as a passive residual. It forecasts that net earnings after taxes in the coming year will be $500,000. The firm has earned the same $500,000 for each of the last five years and has paid between $200,000 and $350,000 out in dividends in each of those years. The company is financed entirely with equity and its cost of equity capital is 12 percent.
1. How much of the coming year's earnings should be paid out in dividends if the company has $400,000 in projects whose expected returns exceed 12 percent?
2. How much should be paid out if the company has investment projects of $5,000,000 whose expected return is greater than 12 percent?
B. Big town Diners are forecasting earnings per share over the next 5 years as follows:
Year 1 2 3 4 5
EPS $2.00 $2.20 $1.90 $2.00 $2.50
The firm has 10,000,000 shares outstanding and is planning an expansion of their eateries. This expansion will require $15 million per year for each of the next four years.
1. Determine the dividends per share and any external financing need if the firm maintains a constant 20% payout ratio.
2. Determine the dividends per share and any external financing need if the firm maintains its current $0.50 per share dividend.
3. Determine the dividends per share and any external financing need if the firm maintains a passive approach to dividends.