CFIN6
Chapter 13 Spreadsheet Problem
Distribution of Retained Earnings
Use the model in File C13 to work this problem.
Ybor City Tobacco Company has for many years enjoyed a moderate, but stable growth in sales and
earnings. In recent times, however, cigar consumption and consequently Ybor’s sales have been falling,
primarily because of the public’s greater awareness of the health dangers associated with smoking.
smoke. Right now, the company estimates that an investment of $15 million will be necessary to
purchase new facilities and to begin production of these products, but the investment could earn a return
of about 18 percent within a short time. The only other available investment opportunity costs $6 million
and is expected to return about 10.4 percent.
The company is expected to pay a $3.00 dividend on its 3 million outstanding shares, the same as its
dividend last year. The directors could be persuaded to change the dividend if there are good reasons for
CFIN6
a. Calculate Ybor’s expected payout ratio, the break point at which the marginal cost of capital (MCC)
rises, and its MCC above and below the point of exhaustion of retained earnings at the current
payout
b. How large should Ybor’s capital budget be for the year?
e. Assume that Ybor’s management is considering a change in the firm’s capital structure to include
more debt. Management would therefore like to analyze the effects of an increase in the debt/assets
ratio to 60 percent. The treasurer believes that such a move would cause lenders to increase the