You are analyzing the following firms in order to make recommendations regarding
ID: 2677692 • Letter: Y
Question
You are analyzing the following firms in order to make recommendations regarding dividend policy and financial leverage.Trabion Industries:
FCFE = $55 million
Dividends Paid = $35 million
ROE = 18.50%
Beta = 1.30
Walma Manufacturing:
FCFE = $60 million
Dividends Paid = $12 million
ROE = 10.50%
Beta = .80
Roberlin Products:
FCFE = $20 million
Dividends Paid = $12 million
ROE = 14.50%
Beta = .90
The risk-free rate of return is 7% and the market rate of return is 12%. Which of these firms would be the most likely to benefit from increasing its dividend payments and adding financial leverage?
I. Trabion Industries
II. Walma Manufacturing
III. Roberlin Products
Explanation / Answer
I. Trabion Industries Reason - Trabion Industries has high beta and high ROE. Therefore cost of equity is very high, adding debt with low cost of debt will lower the overall cost of capital(WACC)and increase firm's value
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