Kahn Inc. has a target capital structure of 60 percent common equity and 40 perc

Question

Kahn Inc. has a target capital structure of 60 percent common equity and 40 percent debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13 percent, a before tax debt of 10 percent, and a tax rate of 40 percent. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (d1) is $3 and the current stock price is $35.
a. What is the company's expected growth rate?
b. If the firm's net income is expected to be $1.1 billion, what portion of its net income is the firm expected to pay out as dividends?

Explanation / Answer

a. rd=10(1-.40) rd=6% re=? WACC= 13% We=60% Wd=40% WACC= We*re +Wd*rd 13= .60*re + .40*6 re=17.67% P0 = D1/r-g $35= $3/.1767-g g=.0909 g= 9.1% b. Current total equity = $10 billion * 60% = $6 billion Total number of shares outstanding = $6 billion / $35 per share = 171,428,571 Each share is expected to get $3, so total dividend paid out = 171,428,571 * 3 = $514,285,714 % of net income to be paid out as dividend = $514,285,714/$1.1 billion = 46.8%

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