Suppose you have just become the president of J&J and the first decision you face is whetherCo go ahead with a plan to renovate the company's Al systems.The plan will cost the company $60 million, and it is expected to save $15 million per yearafter taxes over the next five years.The firm sources of funds and corresponding required rates of return are as follow:$5 million common stock at 16%,$800,000 preferred stock at 12%,$6 million debt at 7%.All amounts are listed at market values and the firm's tax rate is 30%.You are the financial manager and supposed to calculate the NPV. What's the NPV? Do yourecommend taking the project?ง=O NPV $5.167 Millions; I'll recommend the owners to take the project.O NPV=-$1.720 Millions; I'll tell the owners not to take the project.NPV = $4.562 Millions; I'll tell the owners not to take the project.O NPV=-$8.098 Millions; I'll tell the owners not to take the project.

The objective of the question is to calculate the Net Present Value (NPV) of the project to renovate…

Answered: Suppose you have just become the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 6P

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Suppose that you are analysing the capital requirements for your Corporation for next year. You forecast that the company will need $15 million to fund all of its positive-NPV projects and you job is to determine how to raise the money. The corporation’s net income is $11 million, and it has paid a $2 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. Questions: A. Suppose the firm follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital budget? B. If the company follows the residual model with all distributions in the form of dividends, what will be its dividend per share and pay-out ratio for the upcoming year? C. If the company maintains its current $2 DPS for next year, how much retained earnings will be…
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