Please show the formlua that was used to solve the following questions Overholse
ID: 2702206 • Letter: P
Question
Please show the formlua that was used to solve the following questions
Overholser Inc. has forecast net income of $12,000,000 over the next year. Overholser also forecasts a capital budget of $8,000,000 for the year. If the firm maintains its capital budget of 50% equity and 50% debt, how much of a dividend can a dividend can Overholser pay if its follows a strick residual dividend policy?
Instead of paying a cash dividend, Overholser is considering a stock repurchase. The firm currently has 1,500,000 shares of common stock oustanding that have a current market price of $80 per share. If overholser carries out the repurchase, it expects to be able to buy the stock at its current market price. What is Overholser current price to earnings (P/E) ratio?
If Overholser has the amount predicted by the residual dividend model available to pay to shareholders, how many shares can it repurchase?
If the firms P/E ratio is expected to be the same after repurchase, what is Overholser stock price after the repurchase?
Explanation / Answer
Net income = $12,000,000
CapEx = $8,000,000
This capEx will be paid 50% by debt and 50% by equity to maintain current capital structure
Equity used to pay for CapEx = 0.5(8,000,000) = 4,000,000
Residual available for dividend = Net income - Equity used to pay for CapEx
= 12,000,000 - 4,000,000 = 8,000,000