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Average return on the market

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You are analyzing the dividend policy of Conrail, a major railroad, and you have collected the following information from the past five years.

Year

Net Income (Million)

Capital Expenditure (Million)

Depreciation (Million)

Noncash Working Capital (Million)

Dividends (Million)

1991

$240

$314

$307

$35

$70

1992

$282

$466

$295

$(110)

$80

1993

$320

$566

$284

$215

$95

1994

$375

$490

$278

$175

$110

1995

$441

$494

$293

$250

$124

The average debt ratio during this period was 40 percent, and the total noncash working capital at the end of 1990 was $10 million.

a. Estimate how much Conrail could have paid in dividends during this period.

b. If the average return on equity during the period was 13.5 percent, and Conrail had a beta of 1.25, what conclusions would you draw about their dividend policy? (The average Treasure bond rate during the period was 7 percent, and the average return on the market was 12.5 percent during the period.)

Reference no: EM13963197

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