PROBLEM 16-5 EXTERNAL EQUITY FINANCING

Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar
heating system. To meet this demand, management plans to expand production capacity by 40%
with $10 million investment in plant and machinery. The firm wants to maintain 40% debt level in
its capital structure. It also wants to maintain its past dividend policy of distributing 45% of last
year’s net income. In 2015, net income was $5 million. How much external equity must Northern
Pacific seek at the beginning of 2016 to expand capacity as desired? Assume that the firm uses only
debt and common equity in its capital structure.

Jawab:
Retained earnings = Net income (1 – Payout ratio)

= $5 million x (1 – 0.45)

= $5 million x 0.55

= $2.75 million

External equity needed:

Total equity required = New investment x Equity ratio

= $10 million x (1 – 0.40)

= $10 million x 0.60

= $6 million

New external equity needed = $6 million – $2.75 million

= $3.25 million
PROBLEM 16-6 RESIDUAL DIVIDEND MODEL

Welch Company is considering three independent projects, each of which requires a $5 million
investment. The estimated internal rate of return (IRR) and cost of capital for these projects are
presented here:

Project H (high risk) Cost of capital = 16% IRR = 20%

Project M (medium risk) Cost of capital = 12% IRR = 10%
Project L (low risk) Cost of capital = 8% IRR = 9%
Note that project’s cost of capital vary because the projects have different levels of risk. The
company’s optimal structure calls for 50% debt and 50% common equity, and it expects to have net
income of $7,287,500. If Welch establishes its dividends from the residual dividend model, what
will its payout ratio?

Jawab:

Dengan membandingkan IRR dengan WACC, maka Welch Company seharusnya memilih project
H dan L karena IRR > WACC. Jadi, total capital budget dari perusahaan adalah: 2 x $5 million =
$10 million.

Sejumlah $10 milion capital budget tersebut akan didanai 50% dari ekuitas sehingga nilai ekuitas
yang diperlukan adalah:

Capital budget x equity ratio = $10 million x 50%

= $5 million

Ekuitas tersebut didapatkan dari pendanaan internal dengan menahan laba bersih sejumlah $5
million, sehingga sisa retained earnings untuk pembayaran dividen adalah:

$7,287,500 – $5,000,000 = $2,287,500, sehingga payout ratio adalah sebesar

$ 2,287,500
=31.39 %
$ 7,287,500

PROBLEM 16-7 DIVIDENDS

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Bowles Sporting Inc. is prepared to report the following 2015 income statement (shown in
thousands of dollars).
Sales $15,200
Operating costs including depreciation 11,900
EBIT $ 3,300
Interest 300
EBT $ 3,000
Taxes (40%) 1,200
Net Income $ 1,800

Prior to reporting this income statement, the company wants to determine its annual dividend. The
company has 500,000 shares of common stock outstanding, and its stock trades at $48 per share.

a. The company had a 40% dividend payout ratio in 2014. If Bowles wants to maintain this payout
ratio in 2015, what will be its per-share dividend in 2015?

Dividend payout ratio = Total dividends / Net income

Total dividends = Dividend payout ratio x Net income

= 40% x $1,800,000

= 0.4 x $1,800,000

= $720,000

Dividends per share = Dividends / Total number of shares

= $720,000 / 500,000

= $1.44

b. If the company maintains this 40% payout ratio, what will be the current dividend yield on the
company's stock?

Dividend yield = Dividend per share / share price

= $1.44 / $48

= 0.03

= 3%

c. The company reported net income of $1.5 million in 2014. Assume that the number of shares
outstanding has remained constant. What was the company's per-share dividend in 2014?

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 Total dividends = Dividend payout ratio x Net income

= 40% x $1,500,000

= 0.4 x $1,500,000

= $600,000

Dividends per share = Dividends / Total number of shares

= $600,000 / 500,000

= $1.2

d. As an alternative to maintaining the same dividend payout ratio, Bowles is considering

maintaining the same per-share dividend in 2015 that it paid in 2014. If it chooses this policy,
what will be the company's dividend payout ratio in 2015?

Dividend payout ratio = Total dividends / Net income

= $600,000 / $1,800,000

= 0.334

= 33.4%

e. Assume that the company is interested in dramatically expanding its operations and that this
expansion will require significant amounts of capital. The company would like to avoid
transactions costs involved in issuing new equity. Given this scenario, would it make more
sense for the company to maintain a constant dividend payout ratio or to maintain the same per-
share dividend? Explain.

Jawab:
Apabila perusahaan ingin menghindari biaya yang akan timbul dari penerbitan saham baru,
maka sebaiknya perusahaan mempertahankan dividend per share yang sama. Hal ini
dikarenakan perusahaan dapat melaksanakan perluasan operasinya tanpa mempengaruhi
besarnya dividen yang akan diterima investor. Dengan mempertahankan dividend per share
yang sama, investor akan mendapatkan dividen yang stabil, dan investor cenderung lebih
menyukai dividen yang stabil. Sebaliknya, apabila perusahaan memilih untuk mempertahankan
dividend payout ratio yang konstan, maka dividen yang akan diterima investor cenderung tidak
stabil karena nilainya tergantung dari net income yang diperoleh perusahaan. Ketidakstabilan
dividen ini akan menimbulkan ketidakpastian pada investor yang pada akhirnya dapat

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 mengakibatkan penurunan harga saham perusahaan karena pada dasarnya memang investor
lebih menyukai kebijakan dividen yang stabil.

16-8 ALTERNATIVE DIVIDEND POLICIES

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Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.75 out of annual
earnings per share of $2.25. Currently, Rubenstein Bros.’ stock is selling for $12.50 per share.
Adhering to the company’s target capital structure, the firm has $10 million in total invested
capital, of which 40% is funded by debt. Assume that the firm’s book value of equity equals its
market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is
expected to continue this year and into the foreseeable future.

a. Based on this information, what long-run growth rate can the firm be expected to maintain?
(Hint: g = Retention rate × ROE)

Jawab:
Dari soal diketahui sebagai berikut:
Dividend per share (DPS) : $0.75
Earnings per share (EPS) : $2.25
Return on Equity (ROE) : 18%
Long-run growth dapat dihitung dengan persamaan berikut:
g = ROE × Retention Rate
g = ROE × (1 – Dividend payout ratio)
g = ROE × (1 – (DPS/EPS))
g = 18% × (1 – (0.75/2.25))
g = 18% × (1 – (1/3))
g = 18% × 2/3
g = 12%

b. What is the stock’s required return?

Jawab:
Dengan menggunakan pendekatan Discounted Cash Flow (DCF), return dapat dihitung dengan
persamaan:
rs = (D1 / P0) + g
dari soal telah diketahui D1 = $0.75, P0 = $12.50, dan dari jawaban soal a. diketahui g = 12%,
maka:
rs = (D1 / P0) + g
rs = (0.75 / 12.50) + 12%
rs = 6% + 12%
rs = 18%

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c. If the firm changed its dividend policy and paid an annual dividend of $1.50 per share, financial
analysts would predict that the change in policy will have no effect on the firm’s stock price or
ROE. Therefore, what must be the firm’s new expected long-run growth rate and required
return?

Jawab:
Perusahaan mengubah DPS menjadi $1.50, sehingga Dividend payout ratio berubah menjadi:
DPR = DPS/EPS
DPR = 1.5/2.25
DPR = 2/3 = 0.667
Expected long-run growth yang baru:
g = ROE × (1 – Dividend payout ratio)
g = 18% × (1 – 0.667)
g = 6%
Required return yang baru menjadi:
rs = (D1 / P0) + g
rs = (1.5 / 12.50) + 6%
rs = 12% + 6%
rs = 18%

d. Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.75
per share to shareholders, but the firm intends to do so in the form of a stock dividend rather
than a cash dividend. The firm will allot new shares based on the current stock price of $12.50.
In other words, for every $12.50 in dividends due to shareholders, a share of stock will be
issued. How large will the stock dividend be relative to the firm’s current market capitalization?
(Hint: Remember that market capitalization = P0 × number of shares outstanding.)

Jawab:
Dari soal diketahui sebagai berikut:
EPS : $2.25
P0 : $12.50
Total Assets : $10.000.000
Debt ratio : 40%, artinya Equity ratio 60%
ROE : 18%
Untuk dapat mengetahui nilai market capitalization, perlu dihitung dulu berapa jumlah saham
yang beredar dari perusahaan tersebut, dapat dihitung persamaan:

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 Jumlah saham beredar = Net income / EPS
= (Equity capital × ROE) / EPS
= (($10,000,000×60%) × 18%) / $2.25
= $1,080,000 / $2.25
= 480,000

Dari hasil perhitungan tersebut, dapat diketahui nilai market capitalization sebagai berikut:
Market capitalization = P0 × jumlah saham beredar
= $12.50 × 480,000
= $6,000,000

Apabila perusahaan melakukan stock dividend sebesar $0.75, maka jumlah dividen yang
dibayarkan adalah sebesar $0.75 × 480,000 = $360,000. Nilai relatif dari stock dividend tersebut
dibandingkan dengan nilai market capitalization perusahaan adalah sebesar $360,000 /
$6,000,000 = 0,06 atau 6%.

e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how
much will the company’s earnings per share be diluted?

Jawab:
Apabila rencana stock dividend pada soal d dilaksanakan, maka jumlah saham baru yang akan
diterbitkan adalah:

Jumlah saham baru = Dividend value / Price per share

= $360,000 / $12.50
= 28,800 lembar saham

Karena ada penambahan jumlah saham beredar, maka EPS perusahaan berubah menjadi:
EPS = Net income / total saham beredar
= $1,080,000 / (480,000 + 28,800)
= $2.1226

Dilution of EPS merupakan selisih antara nilai EPS lama dengan EPS yang baru:
Dilution of EPS = $2.25 – $2.1226
= $0.13 per share