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A company is analyzing its capital requirements for the next year. The company forecasts that it...

A company is analyzing its capital requirements for the next year. The company
forecasts that it will need $40 million to fund all of its positive-NPV projects. The company’s net
income is $58 million, and it has paid a $2 dividend per share for the past several years (with 24
million common shares outstanding). Its shareholders expect the dividend to remain constant for
the next several years. The company’s target capital structure is 20% debt and 80% equity. A.) If
the company follows the residual model, how much in retained earnings will it need to fund its
capital budget? B.) If the company maintains its current $2 dividend per share for next year, how
much retained earnings will be available for the firm’s capital budget? C.) If the company follows
the residual model with all distributions in the form of dividends, what will be its dividend per
share and the payout ratio for the upcoming year?

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