WACC and Cost of Common Equity Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 10%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $34.
A. What is the company's expected growth rate?
B. If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends?

A. What is the company's expected growth rate?

current stock price = expected dividend / (required rate of return - growth rate)

$34 = $3 / (12% - g)

12% - g = $3 / $34 = 8.82%

growth rate = 12% - 8.82% = 3.18%

B. If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends?

WACC = (equity x Re) + [debt x cost of debt x (1 - tax rate)]

12% = (45% x Re) + (55% x 10% x 0.75) = 0.45Re + 4.125%

0.45Re = 12% - 4.125% = 7.875%

Re = 7.875% / .45 = 17.5%

growth rate = (net income / equity) x (1 - dividend payout ratio)

3.18% = ($1.6 billion / $4.5 billion) x (1 - dividend payout ratio)

3.18% = 0.3556 x (1 - dividend payout ratio)

1 - dividend payout ratio = 3.18 / 0.3556 = 0.089

dividend payout ratio = 1 - 0.089 = 0.911

this means that the company distribute 91.1% of its net income to its stockholders

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation:

answer; work samples;