The Simmons Company expects earnings of $30 million next year. Its dividend payo
ID: 2763332 • Letter: T
Question
The Simmons Company expects earnings of $30 million next year. Its dividend payout ratio is 40 percent, and its proportion of debt (debt/assets ratio) is 55 percent. Simmons uses no preferred stock. a. What amount of retained earnings does Simmons expect next year? b.At what amount of financing will there be a break point in the MCC schedule? c. If Simmons can borrow $12 Million at an interest rate if 11 percent, another $12 million at a rate of 12 percent, and any additional debt at a rate of 13 percent, at what point will rising debt cost break in the MCC schedule?
Explanation / Answer
Answer
The Simmons Company expects earnings of $30 million next year. Its dividend payout ratio is 40 percent, and its proportion of debt (debt/assets ratio) is 55 percent. Simmons uses no preferred stock.
Answer a.
What amount of retained earnings does Simmons expect next year?
Expected Retained Earnings next year = Earnings for next year * (1 – dividend pay-out ratio)
= $ 30 million * (1 – 0.4)
= $ 30 million * (0.6)
= $ 18 million
Answer b.
At what amount of financing will there be a break point in the MCC schedule?
Proportion of equity = 1 - (debt/assets ratio)
= 1 – 0.55
= 0.45
Beark even = Earnings for next year * (1 – dividend payout ratio) / proportion of equity
= $ 30 million * (1 – 0.4) / 0.45
= $ 30 million * (0.6) / 0.45
= $ 18 million / 0.45
= $ 40 million
Answer c.
If Simmons can borrow $12 Million at an interest rate if 11 percent, another $12 million at a rate of 12 percent, and any additional debt at a rate of 13 percent, at what point will rising debt cost break in the MCC schedule?
Note : I think Cost of Equity will be required to answer that question
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.