This is a more difficult but informative problem. James Brodrick & Sons, Incorporated, is growing rapidly and, if at all possible, would
like to finance its growth without selling new equity. Selected information from the company's five-year financial forecast follows.
Year
Earnings after tax ($ millions)
Capital investment ($ millions)
Target book value debt-to-equity ratio (8)
Dividend payout ratio (8)
Marketable securities ($ millions)
(Year 0 marketable securities $240 million)
1
100
175
120
?
240
2
114
300
120
2
240
3
154
300
120
?
240
4
206
356
120
?
240
5
300
470
120
?
240
a. According to this forecast, what dividends will the company be able to distribute annually without raising new equity and while
maintaining a balance of $240 million in marketable securities? What will the annual dividend payout ratio be? (Hint: Remember
sources of cash must equal uses at all times.)
Note: Round dividends to the nearest million dollars and the payout ratio % to the nearest ones place.
