What will be the expected return to the stockholders

Assignment Help Finance Basics

Reference no: EM13904728

Case Study: Montgomery Corporation

Required:

1. a. Refer to Figure 1. Would you say that Montgomery's policy up to now has been to pay a constant dividend, with occasional increases as the company grows?

b. Refer to Figure 2. What type of dividend policies would you say are being practiced by Montgomery's competitors in the retailing industry? Do you think that any firms are following a residual policy?

2. a. Calculate the expected return to the common stockholders under the firm's present policy, given an expected dividend next year of $2.10 and a growth rate of 7.1 percent. Montgomery's stock currently sells for $35.

(Use the dividend growth model):

Expected return (K_e) = (D₁/P_o) + g

b. Assume that, if Don Jackson's proposal were adopted, next year's dividend would be zero but earnings growth would rise to 14 percent. What will be the expected return to the stockholders (assuming the other factors are held constant)?

3. Is the size of the capital budget limited by the amount of net income, as Don implies? What is the maximum size that the capital budget can be in 2006 without selling assets or seeking outside financing?

4. a. Don says the cost of the outside financing is more expensive than the cost of internal financing, due to the flotation costs charged by investment bankers. Given the data you have, what would you say is the firm's cost of internal equity financing?

b. Assume Montgomery can sell bonds priced to yield 13 percent. What is the firm's after tax cost of debt? (The tax rate is 25 percent.)

c. Given the cost of debt and the cost of internal equity financing, why doesn't Montgomery just borrow the total amount needed to fund the capital budget and the dividend as well?

5. Do you go along with Clarence Autry's comment that it's what the stockholders want that counts, not their total rate of return? Why or why not?

6. Barbara Reynolds suggests that, if cash is needed for the capital budget, a stock dividend could be substituted for the cash dividend. Do you agree? How do you think the stockholders would react? Regardless of their reaction, is the stock dividend an equivalent substitute for the cash dividend?

7. After all is said and done, do you think the firm's dividend policy matters? If so, what do you think Montgomery's policy should be?

Reference no: EM13904728

Questions Cloud

How often is the adjustment recalculated? : How often is the adjustment recalculated?

Apply to nursing practice in order to implement competency : Select two (2) of the six QSEN competencies and consider the definitions. For each competency selected, discuss two (2) strategies the RN can apply to nursing practice in order to implement the competency. Indicate if you are addressing the knowledge..

Minimum size of deadweight loss : The demand for comic books is given by P = 90 - Qd. Supply of comic books is given by P = 2Qs. Suppose that the government imposed a price floor of $70 in this market. What will be the minimum size of deadweight loss?

Expected to play under the affordable care act : Long-term care services must be individualized, integrated, and coordinated. Elaborate on this statement, pointing out why these elements are essential in the delivery of long-term care. Describe in detail the role managed care is expected to play un..

What will be the expected return to the stockholders : Assume that, if Don Jackson's proposal were adopted, next year's dividend would be zero but earnings growth would rise to 14 percent. What will be the expected return to the stockholders?

Price elasticity of demand at the market equilibrium : Suppose that the market for paint is in equilibrium. The demand for paint is given by Qd=5000-8P. The supply of paint is given by Qs=2000+2P. What is the price elasticity of demand at the market equilibrium?

How much time will thoreau spend in leisure : How much time will Thoreau spend in leisure - How many units of consumption good will he produce - Using the production function from part a), what is the marginal product of labor at the amount of labor in part a)?

Discuss problems that may affect the firm''s independence : discuss problems that may affect the firm's independence

High-involvement strategies for improving human resource : In your opinion what are “high-involvement” strategies for improving human resource management in organizations? Why? Provide specific examples.

User Account

All Pages