Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 12, Problem 5P
Al Quick, the president of a New York Stock Exchange-listed firm, is very short-term oriented and interested in the immediate consequences of his decisions. Assume a project that will provide an increase of
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You heard about a company that is producing a product that you really believe in. You think you can scrape together some money to buy a couple of shares when you get paid next. First, you would like to make sure that the price seems fair so you will calculate its value. Analysts estimate that the price of the stock is likely to be $82.7 in one year. It is a young company, so they do not pay dividends yet. You estimated that the fair return on the stock is 11.2%. What is your best guess at the fair value of the stock given this information?
Answer:
Suppose the CEO of a $750 million all-equity
firm personally owns $15 million in company
stock. Assume that the risk-neutral CEO
makes investment decisions based strictly on
the change in value (or expected change in
value for risky investments) of her personal
holdings, plus private benefits (if any) she gets
from the investment.
a) Suppose the CEO is considering a risky
investment that will generate a gain with a
present value of $100 million with 50%
probability, but a loss of $150 million (present
value) with 50% probability. Will she invest in
the risky project?
b) Now, suppose that the firm recapitalizes by
borrowing $700 million and pays a special
dividend of $700 million, and suppose that
the CEO reinvests her $14 million dividend
back into the recapitalized firm. (In answering
this question, ignore any change in the overall
value of the firm resulting from the
recapitalization.) Given the same assumptions
as in (i) above, will she invest in the risky
project?
A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 13 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 37 percent and will eventually reach 59 percent during the maturity stage (IV).
a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)
Stage I
$
0.40
Stage II
1.80
Stage III
2.70
Stage IV
3.30
b. Assume in Stage IV that an investor owns 325 shares and is in a 15 percent tax bracket. What will be the…
Chapter 12 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 12 - Prob. 1DQCh. 12 - Why does capital budgeting rely on analysis of...Ch. 12 - Prob. 3DQCh. 12 - Prob. 4DQCh. 12 - What does the term mutually exclusive investments...Ch. 12 - Prob. 6DQCh. 12 - If a corporation has projects that will earn more...Ch. 12 - What is the net present value profile? What three...Ch. 12 - How does an asset’s ADR (asset depreciation...Ch. 12 - Assume a corporation has earnings before...
Ch. 12 - Assume a corporation has earnings before...Ch. 12 - Assume a firm has earnings before depreciation and...Ch. 12 - Assume a firm has earnings before depreciation and...Ch. 12 - Al Quick, the president of a New York Stock...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Assume a 90,000 investment and the following cash...Ch. 12 - Prob. 9PCh. 12 - X-treme Vitamin Company is considering two...Ch. 12 - You buy a new piece of equipment for 16,230, and...Ch. 12 - Prob. 12PCh. 12 - Home Security Systems is analyzing the purchase of...Ch. 12 - Aerospace Dynamics will invest 110,000 in a...Ch. 12 - The Horizon Company will invest 60,000 in a...Ch. 12 - Skyline Corp. will invest 130,000 in a project...Ch. 12 - The Hudson Corporation makes an investment of ...Ch. 12 - The Pan American Bottling Co. is considering the...Ch. 12 - You are asked to evaluate the following two...Ch. 12 - Turner Video will invest 76,344 in a project. The...Ch. 12 - The Suboptimal Glass Company uses a process of...Ch. 12 - Keller Construction is considering two new...Ch. 12 - Davis Chili Company is considering an investment...Ch. 12 - Telstar Communications is going to purchase an...Ch. 12 - Assume 65,000 is going to be invested in each of...Ch. 12 - The Summit Petroleum Corporation will purchase an...Ch. 12 - Oregon Forest Products will acquire new equipment...Ch. 12 - Universal Electronics is considering the purchase...Ch. 12 - Prob. 30PCh. 12 - Prob. 31PCh. 12 - Prob. 32PCh. 12 - Hercules Exercise Equipment Co. purchased a...Ch. 12 - Prob. 2WECh. 12 - Returning to TXN’s summary page, record the...
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