3. Sustainable Food Corp (SFC) has $20 million in assets that is funded by $12 m

Question

3. Sustainable Food Corp (SFC) has $20 million in assets that is funded by $12 million in debt and $8

million in equity, which matches their target capital structure. SFC pays 7% on its debt and its WACC is

9.5%. SFC has a tax rate, marginal and average, of 30%. The company expects to pay a dividend next

year of $0.75 per share from its net income of $1 million and it does not need to issue new common

equity. SFC’s current stock price is $10. What portion of SFC’s net income is it expected to pay in

dividends next year?

Explanation / Answer

Assets 20 Million Debt 12 Million Equity 8 Million Kd 7% Kd after Tax 4.90% 7%*(1-.3) WACC 9.50% D1 0.75 P0 10 No of Shares            8,00,000 8000000/10 Dividend            6,00,000 800000*.75 Net Income (assumed after tax)          10,00,000 Portion of the SFC's net income 60% 600000/1000000

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