ns man pr plan loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

ns man pr plan loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 17MC

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Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $182 million at the end of this year and by $60 million at the end of next year. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) The change in price per share would be $ (Round to the nearest cent.)
Mm.2. Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $57 million at the end of next year. a. If Roybus has 33 million shares outstanding and a weighted average cost of capital of 12.9%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.
Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.
LAFCO Industries believes that its two primary product lines, automotive and commercial aircraft valves, are becoming obsolete rapidly. Its free cash flow is diminishing quickly as it loses market share to new firms entering its industry. LAFCO has $200 million in debt outstanding. Senior management expects the automotive and commercial aircraft valve product lines to generate $25 and 15 million, respectively, in earnings EBITDA next year. The operating liabilities associated with these two product lines are minimal. Senior management also believes that it will not be able to upgrade these product lines because of declining cash flow and excessive current leverage. A competitor to its automotive valve business last year sold for 10 times EBITDA. Moreover, a company similar to its commercial aircraft valve product line sold last month for 12 times EBITDA. Estimate LAFCO's breakup value before taxes.
Johnson Inc. wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $20. Net income for Johnson is currently $12 million. The new facility will cost $20 million, and it will increase net income by $800,000. Johnson raises stock at the current price to finance the facility. Assume a constant price–earnings ratio. Does stock price dilution occur? (A) stock price dilution occurs. (B) stock price dilution does not occur.
The Rock Timber Co. Had total earnings last year of P5million but expects total earnings to drop to P4,750,000 this year because of a slump in the housing industry. There are currently one million shares of common stock outstanding. The company has P4million worth of investments to undertake this year. The company financed 40% of its investment with debt and 60% with equity capital. The company paid P3 per share in dividends last year. a. If the company follows a pure residual dividend policy, how large a dividend will each shareholder receive this year? b. If the company maintains a constant payout ratio each year, how large will each shareholder receive this year? c. If the company follows a constant Peso dividend policy, how large a dividend will each stockholder receive this year?
Wayne, Inc., wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $28 per share, but the book value per share is $8. Net income is currently $4.2 million. The new facility will cost $42 million, and it will increase net income by $810,000. Assume a constant price-earnings ratio. a-1. Calculate the new book value per share. (Do not round intermediate calculations
ERC is the largest logging company in the United States. Their logging reserves are being depleted and is in turn causing sales to fall. In addition,new environmental protection policies are making it very difficult for the procurement of new logging sites. As a result,their dividends are declining at a constant rate of 5% per year.Dividends paid at the end of last yer are 5$ per share, and the required rate of return on the stock is 15%. a) what is the value of ERC stock? b)Assess the estimation techniques of long term corporate investments, in your answer focus on the relationship between time and accuracy in stock valuation techniques?
KMS corporation has assets of $650 million, $65 million of which are cash. It has debt of $216.7 million. If KMS repurchases $21.7 million of its stock: a. What changes will occur on its balance sheet? b. What will be its new leverage ratio? a. What changes will occur on its balance sheet? (Select the best choice below.) A. Both the cash balance and shareholder equity will drop by $21.7 million. B. Both the cash balance and shareholder equity will increase by $21.7 million. C. Both accounts receivable and shareholder equity will drop by $21.7 million. D. Debt will increase by $21.7 million and shareholder equity will decrease by $21.7 million. b. What will be its new leverage ratio? The new leverage ratio after the repurchase is %. (Round to one decimal place.)
Olmsted Inc. has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Olmsted's unlevered cost of capital is 10% and there are 8 million shares outstanding. Olmsted's board is meeting to decide whether to pay out its $40 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.Including its cash, and enterprise value, Olmsted's total market value is closest to ________. Group of answer choices $432.00 million $360.00 million $288.00 million $720.00 million
Rome Corporation invests in the research and development department and will not pay dividends for the next several years. Venetian Industries is interested in acquiring shares of Rome Corporation. Venetian's CEO has estimated Rome's available cash flows for the next 3 years: $7 million, $9 million, and $12 million. After the third year, available cash flow is expected to grow by 5% on a steady basis. Rome Corporation's weighted average cost of capital (WACC) is 7%, the market value of its debt and preferred stock totals $60 million. Rome Corporation has $22 million of non-operating assets and 9 million shares of common stock outstanding. Calculate the present value of expected available cash flows for the next 3 years. Determine the market value of Rome Corporation's operations. Calculate an estimate of the price per share of Rome Corporation.
Zee Manufacturing’s value of operations is equal to $1,800 million after a recapitalization (the firm had $ 200 million debt before the recap). Zee raised additional $400 million in new debt and used this to buy back the stocks. Zee had no short-term investments before or after the recap. After the recap, wd = 0.35. The firm had 60 million shares before the recap. What is the stock price after the recap?