The expected growth rate of Khan Inc. is 5.95% and the firm is expected to pay out about 0.714% of its net income as dividends.
To calculate the expected growth rate of Khan Inc., we need to use the Gordon Growth Model. The formula for this model is:
Expected Growth Rate = (Dividends per Share / Stock Price) + Dividend Growth Rate
Given that the expected dividend next year (D1) is $4 and the current stock price is $28, we can calculate the dividend growth rate using the formula:
Dividend Growth Rate = (Expected Growth Rate - Dividends per Share / Stock Price)
Given that the WACC is 14%, the before-tax cost of debt is 9%, and the tax rate is 40%, we can calculate the firm's expected growth rate using the formula:
Growth Rate = (1 - Payout ratio) * ROE
With the given information, the company's expected growth rate is 5.95%. Therefore, the answer to the first part of the question is 5.95%.
For the second part of the question, we can use the formula:
Payout ratio = (Dividends per Share * Number of Shares) / Net Income
Given that the firm's net income is expected to be $1.6 billion, we can substitute the values into the formula to find the payout ratio:
Payout ratio = (4 * Number of Shares) / 1600
Since the current stock price is $28, we can calculate the number of shares as:
Number of Shares = $10 billion / $28
Substituting the values into the formula:
Payout ratio = (4 * (10 billion / 28)) / 1600
Therefore, the firm is expected to pay out about 0.714% of its net income as dividends. The answer to the second part of the question is 0.714%.
Complete Question
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 9%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $4 and the current stock price is $28.
What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
If the firm's net income is expected to be $1.6 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)
Growth rate = (1 - Payout ratio)ROE
Round your answer to two decimal places at the end of the calculations.