Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 8%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D₁) is $2, and the current stock price is $31. a. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % b. If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate= (1 - Payout ratio) ROE 14.05 45.33 %

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Chapter12: The Cost Of Capital
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Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a
before-tax cost of debt of 8%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected
dividend next year (D₁) is $2, and the current stock price is $31.
a. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places.
14.05
%
b. If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations.
Round your answer to two decimal places. (Hint: Refer to Equation below.)
Growth rate= (1 - Payout ratio) ROE
45.33
%
Transcribed Image Text:Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 8%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D₁) is $2, and the current stock price is $31. a. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. 14.05 % b. If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate= (1 - Payout ratio) ROE 45.33 %
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