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    CeeCee53's Avatar
    CeeCee53 Posts: 7, Reputation: 1
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    #1

    Nov 12, 2011, 02:26 PM
    The Scanlon Company's optimal capital structure calls for 50 percent debt and 50 perc
    The Scanlon Company's optimal capital structure calls for 50 percent debt and 50 percent common equity. The interest rate on its debt, rd, is a constant 10 percent; its cost of common equity from retained earnings, rs, is 14 percent; the cost of equity from new stock, re, is 16 percent; and its marginal tax rate is 40 percent. Scanlon has the following investment opportunities:

    Project A: Cost = $5 million; IRR = 20%
    Project B: Cost = $5 million; IRR = 12%
    Project C: Cost = $5 million; IRR = 9%
    Scanlon expects to have net income of $7,287,500. If Scanlon bases its dividends on the residual dividend policy, what will its payout ratio be?
    ma0641's Avatar
    ma0641 Posts: 15,681, Reputation: 1012
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    #2

    Nov 12, 2011, 02:29 PM
    So far you've posted 3 homework questions. This is a helpline, not a homework do line. Show us your work so far and then we can help.
    CeeCee53's Avatar
    CeeCee53 Posts: 7, Reputation: 1
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    #3

    Nov 12, 2011, 02:34 PM
    I am trying to figure out the ratios to use to solve these questions.
    At this point I think
    I am lost.
    I think I have to do net income( 1-payout ration)
    JudyKayTee's Avatar
    JudyKayTee Posts: 46,503, Reputation: 4600
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    #4

    Nov 12, 2011, 02:39 PM
    Beat me to it - every post is homework, some questions a lot less complicated than others.
    CeeCee53's Avatar
    CeeCee53 Posts: 7, Reputation: 1
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    #5

    Nov 12, 2011, 02:42 PM
    Northern California Heating and Cooling Inc. has a six-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 35 percent with a $10 million investment in plant and machinery. The firm wants to maintain a 40 percent debt/assets ratio in its capital structure; it also wants to maintain its past dividend policy of distributing 45 percent of the prior year's net income. Last year, net income was $5 million. How much external equity must Northern California seek at the beginning of next year to expand capacity as desired?
    This is what I have come up with so far but I am not sure I have done it right

    Retained earnings = Net income (1 – Payout ratio)
    $5,000,000(1 - .45 =0.55) = $2,750,000.
    External equity needed:
    Total equity required = (New investment)(1 – Debt ratio)
    $10,000,000(1 -.40 =0.60) = $6,000,000.
    New external equity needed = $6,000,000 – $2,750,000 = $3,250,000.

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