Problem
A. Find the impact of different payout levels on the need for external funds by 2021. This abbreviated approach uses the total cash-flow figures (that is, for 2015 through 2021) found in the right-hand column of case Exhibit 26.8. To find the amount of new debt, use the basic sources-and-uses-of-funds identity, as used in case Exhibit 26.8. What are the implications of different payout levels for Rockboro's capital structure and unused debt capacity?
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Targeted Dividend Payout
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0%
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20%
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40%
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50%
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Net Income
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$786.4
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$786.4
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$786.4
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$786.4
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Exhibit 26.8
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Dividend
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Earnings retained
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Increase in assets
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1,006.3
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1,006.3
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1,006.3
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1,006.3
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Exhibit 26.8
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Depreciation
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375.6
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375.6
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375.6
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375.6
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Exhibit 26.8
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New debt
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Initial debt (2014)
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120.4
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120.4
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120.4
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120.4
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Exhibit 26.2
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Ending debt (2021)
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Initial equity (2014)
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423.8
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423.8
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423.8
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423.8
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Exhibit 26.2
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Earnings retained
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Ending equity (2021)
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Total capital (2021)
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Debt / Equity (2021)
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Debt capacity
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Max debt / equity = 40%
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Debt capacity used
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Unused debt capacity
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B. Based on the signaling and clientele considerations, how will Rockboro's various providers of capital, such as its stockholders and debtholders, react to a declaration of no dividend? What about the announcement of a 40% payout?
C. What is the nature of the share-repurchase decision that Larson much make? How would this affect the dividend decision?
D. What should Larson recommend? You can use numbers from the case Exhibits 26.1-8 and the analysis above to justify your argument.