Problem 17-11 Payout Policy (LO3) Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings are forecast at $63 million. There are 10 million outstanding shares. The company has traditionally used 60% of earnings to repurchase shares of stock and has reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 4% per year. Assume the cost of equity is 12%. a. Calculate Surf & Turf's current stock price. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now Surf & Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $2.00 per share. The CFO reassures investors that the company will continue to pay out 60% of earnings and reinvest 40%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf's stock price? Ignore taxes. a. Stock price b. The price will decrease. per share

Problem 17-11 Payout Policy (LO3) Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year's earnings are forecast at $63 million. There are 10 million outstanding shares. The company has traditionally used 60% of earnings to repurchase shares of stock and has reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 4% per year. Assume the cost of equity is 12%. a. Calculate Surf & Turf's current stock price. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Now Surf & Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year's dividend will be $2.00 per share. The CFO reassures investors that the company will continue to pay out 60% of earnings and reinvest 40%. All future payouts will come as dividends, however. What would you expect to happen to Surf & Turf's stock price? Ignore taxes. a. Stock price b. The price will decrease. per share

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 17P: Value of Operations Kendra Enterprises has never paid a dividend. Free cash flow is projected to be...

See similar textbooks

Similar questions

Value of Operations Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company’s weighted average cost of capital is 12%. What is the terminal, or horizon, value of operations? (Hint: Find the value of all free cash flows beyond Year 2 discounted back to Year 2.) Calculate the value of Kendra’s operations.
Question 4 Builtrite's common stock is currently selling for $87 a share and the firm just paid an annual dividend of $3.20 per share. Management believes that dividends and earnings should grow at 7% annually. Since new stock would need to be sold to finance an expansion, Builtrite expects flotation costs to be 5% of the expected selling price of $87 a share. Based on this, and a marginal tax rate of 34%, what is the cost of new common stock? O 11.68% O 7.35% O 11.14% O 12.41% Next
Save Answer Question 3 You are trying to estimate the share price for Heavyweight Inc. Heavyweight currently has 40 million shares outstanding, a cost or equity of 20%, a cost of debt of 5%, and a marginal tax rate of 20%. The firm has no excess cash and maintains a debt-to-enterprise value ratio of 55%. It is expected to generate free cash flows of $150 million at the end of the year and free cash flows are expected to grow at an annual rate of 2% in perpetuity. Given this information, and using the WACC method, what is the best estimate for Heavyweight's share price? Select one OL$18.34 $17.31 11, $22.42 ON.$16.49
Question#01 The Rogers Company is currently in this situation: Sales = 14 million; Variable Cost = 7 million Fixed Cost = 3 million tax rate, T = 35%; value of debt, D = $2 million; k d = 10%; ks = 15%; and Shares of stock outstanding, n = 600,000. The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure? Calculate the Break-even point of the company.
Problem 10 (Return on Equity) Pomelo Company's ROE last year was only 3%; but its management has developed a new operating plan that calls for a debt-to-assets ratio of 60%, which will result in annual interest charges of P300,000. The firm has no plans to use preferred stock. Management projects an EBIT of P1,000,000 on sales of P10,000,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the tax rate will be 34%. If the changes are made, what will be the company's return on equity?
Plz use excel Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. The tax rate is 24 percent. What is the value of the firm? What is the value if the company borrows $195,000 and uses the proceeds to repurchase shares? What is the cost of equity after recapitalization?What is the WACC? What are the implications of the firm’s decision to borrow?
Antiques "R" Us is a mature manufacturing firm. The company just paid a dividend of $11.30, but management expects to reduce the payout by 4.5 percent per year, indefinetely. If you require a return of 9 percent on this stock, what will you pay for a share today?
Question Completion Status: QUESTION 3 The Ship-Quick Logistics Company is trying to decide whether to cut its expected dividends for next year from $10 per share to $6 per share in order to have more money to invest in new projects. If it does not cut the dividend, the firm's expected rate of growth in dividends is 4 percent per year and the price of their common stock will be $150 per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 5 percent in the future. Assuming that the investor's required rate of return for the stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $6? Should Ship-Quick cut its dividend? O $99.99 ; Should not cut its dividend O $105.82; Should not cut its dividend. O $110.55; Should cut its dividend. O $155.32; Should cut its dividend. O $175.65; Should not cut its dividend. QUESTION 4 Bonds issued by American Aero Inc. bear an 8% coupon, payable semiannually.…
M2 Firm Value Connor Corp. has an EBIT of $535,000 per year that is expected to continue perpetually. The unlevered cost of equity for the company is 13.2 percent, and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $950,000. a. What is the value of the company? b1. The CFO of the company informs the company president that the value of the company is $3.3 million. b2. Is the CFO correct?
Calculator Scratch Pad Beaver Co has 100 million equity shares in issue and has just reported a profit, after tax, of $55m. A new issue of 50 million equity shares at an issue price of $1.50 is being considered. All proceeds would be used to redeem a bank loan with an annual cost of 8%. Beaver Co pays corporation tax at a rate of 20%. Assume that operating profit (profit before interest and tax) remains constant. If the equity issue goes ahead and the bank loan is redeemed, what will be the new earnings per share figure? $0.367 $0.388 $0.399 $0.598 Time Remaining 02:36:17 4 of 34 Close All P Elag for Review
Y8 Surf & Turf Hotels is a mature business, although it pays no cash dividends. Next year’s earnings are forecasted at $88 million. There are 10 million outstanding shares. The company has traditionally paid out 50% of earnings by repurchases and reinvested the remaining earnings. With reinvestment, the company has generated steady growth averaging 5% per year. Assume the cost of equity is 14%. a. Calculate Surf & Turf ’s current stock price, using the constant-growth DCF model. (Hint: Take the easy route and estimate overall market capitalization.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Now Surf & Turf's CFO announces a switch from repurchases to a regular cash dividend. Next year’s dividend will be $4.40 per share. The CFO reassures investors that the company will continue to pay out 50% of earnings and reinvest 50%. All future payouts will come as dividends, however. What would be Surf & Turf ’s stock price?
Problem 1 You are considering purchasing a share of Belgravia Petroleum Inc. The company just announced its earnings per share of $2.50. Management predicts that earnings will grow at 10% per year for the next 4 years and then at 1% thereafter. Belgravia's policy is to pay out 40% of its earnings in dividends. The discount rate for Belgravia is 12%. How much is the stock price of Belgravia?