Question: MiniSink Inc. is a manufacturing company that has $ 100 million in debt outstanding and 9 million shares trading at $ 100 per share. The current beta is 1.10, and the interest rate on the debt is 8%. In the latest year, MiniSink reported a net income of $ 7.50 per share, and analysts expect earnings growth to be 10% a year for the next 5 years. The firm faces a tax rate of 40% and pays out 20% of its earnings as dividends (the treasury bond rate is 7%).
a. Estimate the debt ratio each year for the next 5 years, assuming that the firm maintains it current payout ratio.
b. Estimate the debt ratio each year for the next 5 years, assuming that the firm doubles its dividends and repurchases 5% of the outstanding stock every year.