Their planned capital budget for the upcoming year is $100.5 million. Their forecasted net income is $150.0 million. The firm has $50.0 million in short-term investments. The firm’s value of operations is $1,937.5 million. The firm carries $242.2 million in debt, and has no preferred stock. There are 100 million shares outstanding.

Outline the procedure for setting dividend policy. Include in your discussion: Signaling hypothesis, clientele effect, stock splits, stock dividends

Calculate, based on the existing capital structure of 87.5 percent equity, how much equity and debt must be raised to finance the planned capital budget.

a. Use the residual distribution approach to determine how much should be paid out as dividends to new shareholders.

b. What would be the new payout ratio, and what would be the dividend per share amount?

Using an Excel data table, show how the payout ratio and DPS would change if net income fell into a range of $90.0 million to $150.0 million. Use increments of 5 million for your analysis.

Calculate, based on the firm’s current value of operations, the intrinsic value of equity and the intrinsic price per share.

Assume now that the firm has distributed the dividends calculated in question 2.

a. What would be the new intrinsic value of the equity and the new intrinsic price per share?

b. What would be the new dividend per share?

Assume now the firm made the distribution in the form of a stock repurchase.

What would be the new intrinsic value of the equity?

How many shares remain outstanding after the repurchase?

What is the intrinsic price per share of stock after the repurchase?

Summarize your findings in a brief recommendation memorandum to Haakon and Per.