Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 15, Problem 3P
American Health Systems currently has 6,400,000 shares of stock outstanding and will report earnings of
a. What is the immediate dilution potential for this new stock issue?
b. Assume that American Health Systems can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
A company has net earnings of AED 10,000 for the current vear and suppose the company maintai
the same earnings for the next year. The
company has 1,000 total outstanding shares during the current year. The company decides to buyback 40% of its shares in the following year.
Show how this decision will impact the company's earnings per share?
Tommy’s Automotive Group currently has 6,400,000 shares of stock outstanding and will report earnings of $10 million in the current year. The company is considering the issuance of 1,700,000 additional shares that will net $30 per share to the corporation.
A. What is the immediate dilution potential for this new stock issue?
B. Assume that Tommy’s Automotive Group can earn 9 percent on the proceeds of the stock issue in time to include them in the current year’s results. Calculate earnings per share. Should the new issue be undertaken based on earnings per share?
Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.7 million shares that are outstanding. Shareholders required a 10 % rate of return on consolidated stock. A. What is the price of Consolidated stock? B. What is the total market value of its equity?
Consolidated now decides to increase next year’s dividends to $20 a share, without changing its investment or borrowing plans. Thereafter, the company will revert to its policy of distributing $10 per year. C. How much new equity capital will the company need to raise to finance the extra dividend payment (enter answer in millions). D. What will be the total present value of dividends paid each year on the new shares that the company will need to issue (answer in millions)? E. what will be the transfer of value from old shareholder to new shareholder (answer in million)?
Chapter 15 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 15 - Prob. 1DQCh. 15 - Prob. 2DQCh. 15 - Prob. 3DQCh. 15 - Prob. 4DQCh. 15 - Prob. 5DQCh. 15 - Prob. 6DQCh. 15 - Prob. 7DQCh. 15 - Prob. 8DQCh. 15 - Prob. 9DQCh. 15 - Prob. 10DQ
Ch. 15 - What is privatization? (LO15-5)Ch. 15 - Louisiana Timber Company currently has 5 million...Ch. 15 - The Hamilton Corporation Company has 4 million...Ch. 15 - American Health Systems currently has 6,400,000...Ch. 15 - Using the information in Problem 3, assume that...Ch. 15 - Jordan Broadcasting Company is going public at 50...Ch. 15 - Prob. 6PCh. 15 - Tiger Golf Supplies has 25 million in earnings...Ch. 15 - Prob. 8PCh. 15 - Walton and Company is the managing investment...Ch. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Prob. 13PCh. 15 - Prob. 14PCh. 15 - Prob. 15PCh. 15 - Prob. 16PCh. 15 - Prob. 17PCh. 15 - Midland Corporation has a net income of 19...Ch. 15 - Prob. 19PCh. 15 - Prob. 20PCh. 15 - Prob. 21PCh. 15 - Prob. 22P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?arrow_forwardS American Health Systems currently has 7,200,000 shares of stock outstanding and will report earnings of $12 million in the current year. The company is considering the issuance of 1,300,000 additional shares that will net $40 per share to the corporation. a. What is the immediate dilution potential for this new stock issue? (Do not round intermediate calculations and round your answer to 2 decimal places.) Dilution b-1. Assume that American Health Systems can earn 15 percent on the proceeds of the stock issue in time to include them in the current year's results. Calculate earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) Earnings per share per share b-2. Should the new issue be undertaken based on earnings per O Yes O No share?arrow_forwardPimento Inc. estimates that this year’s earnings will be $75 million. There are 12 million shares outstanding at a price of $27.50 per share. Pimento had been following a 100% dividend payout policy until now but would now like to shift to the Residual Dividend policy for this year. Dividends from this year’s earnings are paid next year. a) What is the EPS and DPS for Pimento under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million and the target capital structure is 1.5:1, willPimento be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Investors require a 22.72% rate of return. Ignore taxes. c) IfPimento shifts from a 100% payout policy to the residual dividend policy, what impact will this have on its stock price, assuming the firm earns 22.72% as its ROE? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated…arrow_forward
- river stock plans to pay dividends of $1.36, 1.15, $1.35, and $1.62 at the end of the next four years, respectively. After that, the company will be sold and shareholders are expected to receive $82.40 per share in year 6 when the sale should be finalized. If the required return is 11.4 percent, what is the current value of one share of this sock? $46.50 $51.08 $47.29 $47.71 $51.87arrow_forwardCoolibah Holdings is expected to pay dividends of $1.30 every six months for the next three years. If the current price of Coolibah stock is $22.40, and Coolibah's equity cost of capital is 16%, what price would you expect Coolibah's stock to sell for at the end of three years? O A. $29.91 O B. $31.21 O C. $26.01 O D. $28.61arrow_forwardShifa LLC has 2000000 shares at the current market price of OMR 3.570 each. It also has OMR 1000000 worth of debt. The expected return on equity and debt are estimated as per the month of issue. Corporate tax rate is 20% per annum. Monthly equity and debt returns are as follows : Year 2020 Equity Return % Debt Return % February 10.0 7.5 a) Calculate the WACC as per the selected month b) Justify the circumstances where a company can use WACC as an effective discount rate (need references to part (a) above.arrow_forward
- For 2020, the annual earnings for Eveready Security Equipment were $6,800,000. The corporation has 13,156,300 shares of common stock outstanding and pays an annual dividend of S0.21 per share. The ciosing price for a share of common stock was $22 last night. Calculate the following. (Round all answers to two decimal places if necessary.) 1. Current yieldi 2. Earnings per share: 3. Price-earnings (PE) ratio:arrow_forwardNuts Incorporated is expected to pay annual dividends of $3.33 and $4.44 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $4.66 a share. What is the value of this stock at a required return of 10.8 percent? $27.11 O $28.05 $28.23 $28.36 O $31.08 0000 247arrow_forwardAsonia Co. will pay a dividend of $4.30, $8.40, $11.25, and $13.40 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 9.9 percent on the company's stock, what is the stock price? $30.81 $33.17 $34.82 $28.53 $40.07arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Excel Applications for Accounting Principles
Accounting
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY