Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 17, Problem 6QP
Summary Introduction
To determine: Changes in the equity of the firm due to repurchase of dividends.
Introduction:
Stock repurchase: A company buying its own stock is termed as stock repurchase. It is like the buyback of shares, whereas the cash dividend is the distribution of a portion of company’s earnings to the shareholders.
Summary Introduction
To determine: The new outstanding share.
Summary Introduction
To determine: The price per share after the share repurchase.
Summary Introduction
To discuss: Whether the share repurchase is as effective as a cash dividend.
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[multiple choice questions]
INDO Inc. always pays all of its earnings as dividends, and therefore has no retained earnings. The same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity. The targeted capital structure consists of: common stock, preferred stock, and debt. Which of the following events will reduce WACC?
a. The market risk premium is decreasing.
b. Flotation costs associated with issuing new common stock increase.
c. The company's beta is increasing.
d. Inflation is expected to increase.
e. The flotation costs associated with issuing preferred stock increase.
[EXCEL] Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock? Please use Excel.
[EXCEL] Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock?
Chapter 17 Solutions
Fundamentals of Corporate Finance
Ch. 17.1 - Prob. 17.1ACQCh. 17.1 - What are the mechanics of the cash dividend...Ch. 17.1 - How should the price of a stock change when it...Ch. 17.2 - How can an investor create a homemade dividend?Ch. 17.2 - Prob. 17.2BCQCh. 17.3 - Prob. 17.3ACQCh. 17.3 - Why do flotation costs favor a low payout?Ch. 17.4 - Why might some individual investors favor a high...Ch. 17.4 - Prob. 17.4BCQCh. 17.5 - How does the market react to unexpected dividend...
Ch. 17.5 - Prob. 17.5BCQCh. 17.6 - Prob. 17.6ACQCh. 17.6 - Prob. 17.6BCQCh. 17.8 - Prob. 17.8ACQCh. 17.8 - How does the accounting treatment of a stock split...Ch. 17 - Dividends are paid to the parties listed as...Ch. 17 - Prob. 17.3CTFCh. 17 - Prob. 17.4CTFCh. 17 - Prob. 17.8CTFCh. 17 - Dividend Policy Irrelevance [LO2] How is it...Ch. 17 - Prob. 2CRCTCh. 17 - Prob. 3CRCTCh. 17 - Prob. 4CRCTCh. 17 - Prob. 5CRCTCh. 17 - Prob. 6CRCTCh. 17 - Prob. 7CRCTCh. 17 - Prob. 8CRCTCh. 17 - Prob. 9CRCTCh. 17 - Prob. 10CRCTCh. 17 - Prob. 1QPCh. 17 - Prob. 2QPCh. 17 - Prob. 3QPCh. 17 - Prob. 4QPCh. 17 - Regular Dividends [LO1] The balance sheet for...Ch. 17 - Prob. 6QPCh. 17 - Prob. 7QPCh. 17 - Stock Dividends [LO3] The company with the common...Ch. 17 - Stock Splits [LO3] In the previous problem,...Ch. 17 - Homemade Dividends [LO2] You own 1,000 shares of...Ch. 17 - Prob. 11QPCh. 17 - Stock Repurchase [LO4] Galles Corporation is...Ch. 17 - Expected Return, Dividends, and Taxes [LO2] The...Ch. 17 - Dividends and Taxes [LO2] As discussed in the...Ch. 17 - Prob. 15QPCh. 17 - Dividends versus Reinvestment [LO2] After...Ch. 17 - Prob. 1MCh. 17 - Prob. 2MCh. 17 - Prob. 3MCh. 17 - Prob. 4MCh. 17 - Prob. 5MCh. 17 - Prob. 6M
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- the balance sheet look like after the dividends are paid? Q.4 Rudolph Corporation is evaluating an extra dividend versus a share repurchase. In either case, $11,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $58 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections in answering the first two questions. (a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth. (b) What will be the effect on Rudolph's EPS and P/E ratio under the two different scenarios? (c) In the real world, provided tax deductions are made, which of these actions would you recommend? Why? O Search END OF ASSIGNMENT hp 11 - what will 0 1 W Varrow_forwardQ2. In Q1, suppose the company gives up the cash dividend plan because of shareholder opposition.Instead, the company decides to buyback $22,800 worth of stock. a) How many shares will be repurchased? b) What will the price per share be after the repurchase according to MM model?arrow_forward6. IPO price stabilization Which of the following strategies can underwriters use to prevent institutional investors from flipping? Check all that apply. They can require an overallotment clause in the underwriting agreement of the IPO. They can agree to make more shares of future IPOS available to investors that hold on to the initial shares for a relatively long period of time. They can require a lockup clause in the underwriting agreement of the IPO. They can agree to sell the shares in the IPO at a lower price than suggested by their bookbuilding analysis.arrow_forward
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