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##### Question 1 10 marks Golden Corporation predicts...

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Question 1 10 marks Golden Corporation predicts its net earnings in the upcoming year will be \$5 million. There are 1,000,000 common shares outstanding. Golden currently has long term debt of \$68 million and total common equity of \$102 million. a. Assuming that Golden Corporation reinvests all profits, what is the maximum amount of investment funds that will be available without raising new funds through the issue of new common shares? Golden will maintain its ratio of long-term debt to equity. (4 marks) b. Suppose that Golden Corporation uses a residual dividend policy and that planned capital expenditures are \$7 million. Based on this information and the previous answer what is the predicted dividend per share? If you could not solve the previous answer assume that it was \$10 million. (4 marks) c. If Golden decides not to make any capital outlays for the coming year, what will be the dividend under the residual dividend policy? What will new borrowing be? (2 marks) Question 2 20 marks The president of Heather?s of New Glasgow, a national food retailer, has asked you to answer a letter from a major shareholder about Heather?s dividend policy. The shareholder has asked for an estimate of the dividend that Heather?s is likely to pay next year. You gather the following information: ? Heather?s follows a residual dividend policy ? The total capital budget for next year is likely to be one of three amounts depending on the results of capital budgeting studies that are still under review. The three possible capital budgets are \$3 million, \$4 million and \$5 million. ? The forecasted level of reinvested profits next year is \$3.5 million ? The optimal capital structure is a debt 30% and common equity 70% 1. Briefly describe what is meant by a residual dividend policy. (2 marks) 2. Compute the amount of the dividend (or the amount of new common share financing needed) and the dividend payout ratio for each of the three capital expenditure amounts (\$3, \$4 and \$5 million). (10 marks) 3. Differentiate between a constant payout ratio dividend and a regular dividend policy. (2 marks) 4. Why do some corporations issue stock dividends? What is a stock dividend? (3 marks) 5. Why do some corporations repurchase shares instead of issuing dividends? (3 marks)

Paper#11887 | Written in 18-Jul-2015

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