ABC telecom in is expected to generate $240 million in next income over the next

Question

ABC telecom in is expected to generate $240 million in next income over the next year. ABC Telecom INC stockholders expect it to maintain it's long run dividend payout ratio of 40% earnings. If the company wants to maintain it's current capital structure of 60% debt and 40% equity , what is the maximum capital budget it can support with this years expected net income. IF ABC telecom INC reduces the amount of it’s forecasted capital budget, how will this affect the firm’s annual dividend, assuming that all other factors are held constant? A. The amount that ABC telecom INC will pay out in dividends this year will increase. B. The amount that ABC telecom INC will pay out in dividends this year will decrease. What kind of company is most likely to follow a strict residual distribution policy? A. A firm with table, predictable earning and investment B. A firm whose investments needs change often. C. All companies D. A firm whose earnings are cyclical and follow the economy If you were to graph a firms earning, cash flows and dividends over the past 20 years, which would you expect to be the most stable over time? A. Earning B. Dividends C. Cash flows

Explanation / Answer

Expected Net Income = $ 240 Million

Expected Retained Earning = Net Income*(1-payout ratio)

Expected Retained Earning = 240*(1-40%)

Expected Retained Earning =$ 144 Million

Maximum capital budget it can support   = Expected Retained Earning/Weight of Equity

Maximum capital budget it can support   = 144/40%

Maximum capital budget it can support   = $ 360 Million

1) IF ABC telecom INC reduces the amount of it’s forecasted capital budget, how will this affect the firm’s annual dividend, assuming that all other factors are held constant?

A. The amount that ABC telecom INC will pay out in dividends this year will increase.

Note : Since forecasted capital budget reduces than it would required less equity portion which would reduce the requirement of retained earning and which will increase the dividend portion on net income

2)What kind of company is most likely to follow a strict residual distribution policy

D. A firm whose earnings are cyclical and follow the economy

Note : if earning arecyclical than the company invest that proportion which required in company

3)

If you were to graph a firms earning, cash flows and dividends over the past 20 years, which would you expect to be the most stable over time?

B. Dividends

Note : Dividend are often stable as its the decison of management where company retain he money if there is huge profit to meet new investment and distribute a fixed percentage

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