St Hubbins Industrial Technologies (StHIT) predicts that earnings in the coming year will be $45 million. There are 12 million shares outstanding and StHIT maintains a D/E ratio of 2.0. The firm’s value is $300 million.
Questions & Tasks 1. Calculate the maximum investment funds available without issuing new Equity and the increase in borrowing that goes along with it.
2. Suppose the firm uses a residual dividend policy. Planned capital expenditures total $60 million. Based upon this information, determine Dividends per Share (DPS).
3. In question 2, how much borrowing will take place? What is the Addition to Retained Earnings?
4. Suppose StHIT plans no capital investments in the coming year. Determine Dividends, DPS and new borrowing in the coming year.
5. Suppose StHIT wishes to maintain its current capital structure but wishes to maintain an existing dividend of $1.50 per share. Calculate the firm’s available capital budget under this scenario. Specify the firm’s plowback ratio.