7.5. McCabe Company has $115 million of bonds outstanding, with a coupon of 4%,

Question

7.5. McCabe Company has $115 million of bonds outstanding, with a coupon of 4%, selling at 95. It has 1 million shares of $3.50 preferred stock and 30 million shares of common stock. McCabe has EBIT of $60 million this year, and it has income tax rate of 30%. McCabe must also pay a principal payment of $13.5 million to the bondholders. The company has decided to have a dividend payout ratio of 28%. What dividend should McCabe declare on the common stock per share?

ANSWER: 20.328¢ PLEASE SHOW SOLUTIONS

Explanation / Answer

Net income = (EBIT-interest*debt)*(1-tax rate)-prefered dividends

= (60-0.04*115)*(1-0.3)-3.5 = 35.28

Net income - capital repayment = 35.28-13.5 = 21.78

Dividends = (Net income - capital repayment)*dividend payout/number of share = 21.78*.28/30 = 20.328 cents

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