If a company has a stated dividend policy of paying out 55 percent of its net income and wants to expand its capacity with a $20 million investment, what else must be known to determine the amount of external equity it must seek?
Explanation
This is an application of the concepts in the residual model and problem 15-5. To find the need for external equity, a firm must compare the equity required for its capital budget with the amount of earnings it has retained after paying dividends. This requires knowing the net income, payout ratio, and target capital structure.
Other questions
What is the central argument of the dividend irrelevance theory, as advanced by Miller and Modigliani (MM)?
According to the bird-in-the-hand fallacy, as described by MM, what is the argument for why investors might prefer dividends to capital gains?
What is the primary implication of the information content, or signaling, hypothesis of dividend policy?
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What is the primary purpose of a stock split?
What is a stock dividend?
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What is the clientele effect theory of dividend policy?
A firm follows a strict residual dividend policy. If its investment opportunities improve, meaning its optimal capital budget increases, what will likely happen to its dividend payout ratio, holding all else constant?
What is a primary tax advantage for an individual investor to receive capital gains from a stock repurchase instead of a cash dividend?
Which of the following is considered an advantage of stock repurchases from the firm's perspective?
Suppose you own 100 shares of a company's stock. The EPS is $4.00, the DPS is $2.00, and the stock sells for $60 per share. If the company announces a two-for-one split, what would you expect the adjusted EPS and DPS to be immediately after the split?
The date on which a company closes its stock transfer books and makes up a list of shareholders to receive a dividend is called the:
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What is the primary motivation for a firm to establish a Dividend Reinvestment Plan (DRIP)?
Which of the following best describes the catering theory of dividends?
Gamma Industries has a net income of $3,800,000 and 1,490,000 shares of common stock outstanding. The stock trades at $67 per share. If Gamma uses available cash to repurchase 10 percent of its shares at the current market price, and the P/E ratio remains unchanged, what will be the stock price following the repurchase?
If a stock's price is $30.50 on December 3rd, and the company has an ex-dividend date of December 4th for a $0.50 dividend, what would be the expected opening price on December 4th, barring other market fluctuations?
What is the primary constraint imposed by the impairment of capital rule on dividend payments?
A stock trades for $145 a share. The company is considering a 3-for-2 stock split. Assuming the split has no effect on the total market value of its equity, what will be the company's approximate stock price following the split?
What is the primary difference between how a stock repurchase and a cash dividend affect a company's balance sheet?
According to the residual dividend model, what is the first step a firm takes when determining its dividend policy?
Stock that has been repurchased by a firm is referred to as:
Altamonte Telecommunications has a target capital structure of 45 percent debt and 55 percent equity. The company's capital budget for the upcoming year is $1,000,000. If the company reports a net income of $1,200,000 and follows a residual dividend policy, what will be its dividend payout ratio?
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Which of these industries would most likely have a high dividend payout ratio?
Which factor is generally considered more critical for a company's ability to maintain a stable dividend?
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Which of the following is NOT a constraint on dividend policy discussed in the text?
What is the primary difference in how Miller-Modigliani (MM) and Gordon-Lintner (GL) view the riskiness of a firm's cash flows to investors?
A firm has a policy to maintain a constant dividend payout ratio of 25 percent. Last year, net income was $1.35 million. This year, net income is expected to be $1.638 million. The number of shares is constant at 320,000. What will be the company's dividend per share this year?
Why might a firm with temporary excess cash flows prefer a stock repurchase over increasing its cash dividend?
What is the primary role of cash flows in determining a company's ability to pay dividends, as illustrated by the Exxon Mobil example?
What is a key similarity between a stock split and a stock dividend?
What does the optimal dividend policy aim to strike a balance between?
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A company follows a pure residual dividend policy and has a target capital structure of 40 percent debt and 60 percent equity. Its net income is $7,500,000. If its capital budget is $8,000,000, what will be its dividend payout ratio?
How do financial managers typically use the residual dividend model in practice?
Which of the following is a disadvantage of stock repurchases for the firm?
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What is the primary reason the actual stock price drops by less than the dividend amount on the ex-dividend date?