Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fu
ID: 2699635 • Letter: K
Question
Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 8%, 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 $2 and the current stock price is $22.
A. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
B. If the firm's net income is expected to be $2.0 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
WACC = 60% * Re + 40% * 8% * (1-40%)
Re = 16.8%
company's growth rate
Po= D1/(r-g)
22 = 2/(16.8% - g)
growth rate = 7.71%
2) payout ratio = 1 - growthrate/ROE
= 1 - 7.71%/16.8%
= 54.11%
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