Question 2
Bradford plc. is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of £100 with a total funds raised 30 million. These bonds carry an annual coupon payment of £10, and are due to be redeemed in four years. Investors currently require a yield of 6% on the bonds. The firm also has 3,000,000 ordinary shares outstanding at the current price of £45.54. Bradford plc. is now reviewing its capital budget for the next year. It has paid a £1 dividend per share over the past several years, and its shareholders expect the dividend to remain constant over the next several years. The company forecasts that it will require £13 million to fund all its profitable projects and its net income will be £12m for the next year
i) What is the current capital structure of Bradford plc.? (10 marks)
ii) If the firm follows the residual dividend model and maintains its current capital structure, what will be the company’s dividend per share and payout ratio for the next year? (8 marks)
iii) Suppose the firm’s management decides to continue to pay the £1 per share and maintain its target capital structure and capital budget. What is the minimum amount of new common stock that the company would have to issue to meet each of its objectives? (7 marks)
