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 $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 9%, 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 $23.

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

a.)
rd=11(1-.30)
rd=7.7%
re=?
WACC= 15%
We=70%
Wd=30%
WACC= We*re +Wd*rd
15%= .70*re + .20*7.7%
re=19.2286%

P0 = D1/r-g
$23= $2/.192286-g
g=0.1053
g= 10.53%

b.
Current total equity = $11 billion * 70% = $7.7 billion

Total number of shares outstanding = $7.7 billion / $23 per share = 3,347,82609

Each share is expected to get $2, so total dividend paid out = 334782609 * 2= $669,565,217

% of net income to be paid out as dividend = $669565217/$1.2 billion = 55.797%

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