Pencil Inc., manufacturer of mechanical pencils, uses the residual dividend mode

Question

Pencil Inc., manufacturer of mechanical pencils, uses the residual dividend model to set its dividends. Selected financial information for Pencil Inc. is provided in the table below. Pencil Inc. has many new project opportunities and so has decided to cancel its dividend this year. What is the maximum that Pencil Inc. can invest in new projects using internal equity only? If Pencil Inc. goes ahead with the investment plan calculated in Part a, then how much new debt will it have to take on in order to maintain its target capital structure? What is the maximum that Pencil Inc. can invest in new projects using internal equity only? The maximum Pencil Inc. can invest using internal equity only is million. If Pencil Inc. goes ahead with the investment plan calculated in Part a, then how much new debt will it have to take on in order to maintain its target capital structure? Pencil will need to take on million in new debt.

Explanation / Answer

a Thew question is not very clear. If the new project is financed with equity   only and no debt , and the target capital structure is not manitaned , then the   maximum investment amount will be equal to Net income =$61 million. If the Target Capital Structure is maintaned , the iNvestment amount will be =61/0.75= $81.33 million .   b Out of this $81.33 million , $61 million will   be Equity nad $20.33 million new debt. So new debt to be raised =$20.33 million

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.