Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fu
ID: 2748681 • Letter: K
Question
Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $10 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 $2 and the current stock price is $27.
a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
b. f the firm's net income is expected to be $1.5 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) Calculation of growth
WACC = 14%
Before-tax cost of debt =11%
50% common equity and 50% debt to fund
Weight of equity = .50 and weight of debt = .50
WACC = weight of equity * Cost of equity + weight of debt * Cost of Debt
.14 = 0.50 * Ke + 0.50 * .11(1-.40)
Ke = 21.4 %
Ke = D1/P0 + g
.214 = 2/27 + g
g = 14%
B) calculation of portion of net income that firm expected to pay out as dividends
ROE = Net income / shareholders fund *100
= 1.5 / 5 *100
= 30%
Growth rate = (1 - Payout ratio)ROE
.14 = (1- Payout ratio ) * .30
Payout ratio = 53.33 %
Portion of net income that firm expected to pay out as dividends
= 1.5 billion * 53.33 % = 0.80
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.