Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fu

Question

Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 12%, 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 (D,) is $3, and the current stock price is $30. a. What is the company's expected growth rate? Round your answer to two decimal places.at the end of the calculations. Do not round your intermediate calculations. b. If the frm's net income is expected to be $1.2 bilin, what portion of its net income is the firm b. If the 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. Do not round your intermediate calculations

Explanation / Answer

WACC=45%*cost of equity+55%*cost of debt*(1-tax rate)

13%=45%*cost of equity+55%*12%*(1-40%)

cost of equity=(13%-3.96%)/45%

=20.09%

growth rate=cost of equity-(D1/Price)=20.09%-(3/30)

=10.09%

b.

growth rate=(1-payout ratio)*ROE

10.09%=(1-payout ratio)*(1.2/(11*45%))

payout ratio=1-(10.09%/((1.2/(11*45%)))

=58.38%

the above is answer

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.