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The company follows a pure residual dividend policy
Course:- Finance Basics
Reference No.:- EM131097450




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2. Lindsey Insurance Co. has current sales of $10 million and predicts next year's sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.

a. What are Lindsey's total financing needs for the upcoming year?

b. Given the above information, what are Lindsey's discretionary financing needs?

3. Worthington, Inc. is planning to issue $7,500,000 in 120-day maturity notes carrying a rate of 11 percent per year. Worthington's commercial paper will be placed at a cost of $35,000. What is the effective cost of credit to Worthington?

Please answer ONE of the following:

1. Coppell Timber Company had total earnings last year of $5,000,000, but expects total earnings to drop to $4,750,000 this year because of a slump in the housing industry. There are currently 1,000,000 shares of common stock outstanding. The company has $4,000,000

worth of investments to undertake this year. The company finances 40 percent of its investments with debt and 60 percent with equity capital. The company paid $3.00 per share in dividends last year.

a.       If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year?

b.       If the company maintains a constant dividend payout ratio each year, how large a dividend will each shareholder receive this year?

c.       If the company follows a constant dollar dividend policy, how large a dividend will each shareholder receive this year?




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