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Problem Based on Chapter 14, Residual Dividends
Middlesex Plastics Manufacturing had 2011 Net Income of $15.0 Million. Its 2012 Net Income is forecast to increase by 8%. The company’s capital structure has been 35% Debt and 65% Equity since 2010, and the company plans to maintain this capital structure in 2012. The company paid $3.0 Million cash dividends in 2011. The company is planning to invest in a major capital project in 2012. The capital budget for this project is $12.0 Million in 2012. Given:

2011 Net Income = $15,000,000
2012 Net Income = increased by 8% = ($15,000,000) + ($15,000,000 * 8%) = $16,200,000 2012 Target Equity Ratio = 65%
2011 Dividend Payout = $3,000,000
2012 Capital Budget = $12,000,000

1. If Middlesex increases its cash dividends in 2012 at the same rate of growth as its Net Income rate, what will be the total 2012 dividend payout in Dollars?
2. What is 2012 dividend payout ratio if the company increases its dividends at 8%?

3. If the company follows a residual dividend policy, and maintains its 35% Debt level in its capital structure, and invests in the $12.0 Million capital budget in 2012, what would be the Residual Dividend level (in Dollars) in 2012? What would be this Residual Dividend payout ratio?

4.How much additional capital (Debt and/or Equity) will the company have to raise from outside sources in 2012 if it invests in this capital project, and follows a residual dividend policy?

5. What would be the prudent dividend policy for 2012?: Pay dividends at the current dividend growth rate of 8%, or pay the residual dividend amount.

Problem 19-3 (Chapter 19) on Warrants
This problem is posted on page 781 of the textbook.

(19–3) What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through (a) convertibles and (b) warrants?