Question Details

DeAngelo Corp.'s projected net income 



 .	Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $1,000,000.  If the company follows a residual dividend policy, how much dividends will it pay or, alternatively, how much new stock must it issue?
								
		Dividends	Stock Issued					
	a.	$514,425	$162,901					
	b.	$541,500	$171,475					
	c.	$570,000	$180,500					
	d.	$600,000	$190,000					
	e.	$0	$200,000					

 .
DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%.  DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future.  The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.  Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 75%, other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.
								
		Increase in Capital Budget				
		Increase Debt to 75%	Lower Payout to 20%	
Do Both				
	a.	$114.0 	$73.3 	$333.9 				
	b.	$120.0 	$77.2 	$351.5 				
	c.	$126.4 	$81.2 	$370.0 				
	d.	$133.0 	$85.5 	$389.5 				
	e.	$140.0 	$90.0 	$410.0 				
						

 .	The following data apply to Grullon-Ikenberry Inc. (GII):
								
	Net income (NI) expected for the coming year	$625,000		
	Currently outstanding shares 		100,000		
	Current stock price			$40.00		
								
	The company is in a mature industry.  Therefore, it plans to distribute all of its income at year-end, and its earnings are not expected to grow.  The CFO is now deciding whether to distribute income to stockholders as dividends or to use the funds to repurchase common stock.  She believes the P/E ratio will not be affected by a repurchase. Moreover, she believes that the stock can be repurchased at the end of the year at the then-current price, which is expected to be the now-current price plus the dividend that would otherwise be received at year-end.  Disregarding any possible tax effects, how much would a stockholder who owns 100 shares gain if the firm used its net income to repurchase stock rather than for dividends? 
								
	a.	$564.06						
	b.	$593.75						
	c.	$625.00						
	d.	$656.25						
	e.	$689.06						





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