Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fu
ID: 2370929 • Letter: K
Question
Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 10%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2 and the current stock price is $21.
a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
_______ %
b. If the firm's net income is expected to be $1.3 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Use Equation 10-9.)
Round your answer to two decimal places at the end of the calculations.
_________ %
Explanation / Answer
Target Capital structure:
Common equity = 60%
Debt = 40%
Operating Assets = $8,000,000,000
WACC = 14%
Before-tax cost of debt = 10%
Tax rate = 40%
Next year dividend (D1) = $2
Current stock price (P0) = $21
(a) Calculating Company
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