Kahn Inc. has a target capital structure of 70% common equity and 30% debt to fu

Question

Kahn Inc. has a target capital structure of 70% common equity and 30% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 11%, 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 $3 and the current stock price is $30.

What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
%

If the firm's net income is expected to be $1.2 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)

Growth rate = (1 - Payout ratio)ROE

Round your answer to two decimal places at the end of the calculations.
%

Explanation / Answer

Answer Calculation of cost of equity(ke)

Weighted Average cost of capital = ke* weight of equity + kd * weight of debt

14% = ke * .70 + 11(1-.4)* .30

ke = 17.17%

Growth rate   

ke = D1/P0 + g

17.17% = 3/30 +g

Growth rate(g) = 7.17%

Pay out ratio

Growth rate = (1 - Payout ratio)ROE

7.17% = (1- Pay out ratio) 17.17%

Pay out ratio = 58.24%

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