535 words - 3 pages

FI 516

Week 1 Homework

Chapter 14 Residual Dividends

Middlesex Plastics Manufacturing had 2011 net income of $15.0 million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2012, and the company plans to maintain this capital structure in 2012.

1. If Middle sex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?

NI Increased by 8%= $15,000 * .08= $16,200,000

Total dividends payout = $3,000,000 * .08 = $3,240,000

2. What is the 2012 dividend payout ration if the company increases its dividends at 8%?

$3,240,000/$16,200,000 = .20

The 2012 ...view middle of the document...

35 * $12,000,000 = $4,200,000

Additional capital is $4,200,000

Problem 19-3

Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25.

A. Calculate the exercise value of the firms warrants if the common sells at each of the following prices:

1. $20 -$ 25 = $5

2. $25 - $25 = $0

3. $25 - $30 = $5

4. $100 - $25 = $75

B. Assume the firms stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon must the company set on the bonds with warrants if they are to clear the market?

Let the bonds be issued at par i.e. at $1,000

Thus value of warrants + Value of bond= $1,000

Value of warrants:

No of warrants= 50

Value of warrants: $3

Total value= $150 =50 x 3

Value of bond:

n= 20 years

r= 12.00% per annum

PVIF (20 periods, 12.% rate)= 0.103667

PVIFA (20 periods, 12.% rate)= 7.469444

Redemption value=Par value = $1,000

PVIF X Redemption value= 103.67 (0.103667*1000)

PVIFA X interest payment per period= 7.469444 * interest payment per period

$150 + 103.67 + 7.469444 X interest payment per period $1,000

Interest payment per period= $99.92 (746.33 / 7.469444)

Rounded is $100

Thus annual dollar coupon payment= $100

Par value= $1,000

Coupon rate= 10% (100 / 1000)

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