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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Textbook Question
Chapter 8, Problem 5CRCT
Common versus
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Effects of a Stock Exchange [LO3] Consider the following premerger information
about Firm A and Firm B:
Total earnings
Shares outstanding
Price per share
Firm A
$4,350
1,600
$ 43
Firm B
$1,300
400
$ 47
Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for
each share of B's stock. Both Firm A and Firm B have no debt outstanding.
a. What will the earnings per share (EPS) of Firm A be after the merger?
b. What will Firm A's price per share be after the merger if the market incorrectly
analyzes this reported earnings growth (that is, the price-earnings ratio does not
change)?
c. What will the price-earnings ratio of the postmerger firm be if the market cor-
rectly analyzes the transaction?
d. If there are no synergy gains, what will the share price of Firm A be after the
merger? What will the price-earnings ratio be? What does your answer for the
share price tell you about the amount Firm A bid for Firm B? Was it too high?
Too low? Explain.
LO 1
7.4 Dividend Growth Model Under what two assumptions can we use the
dividend growth model presented in the chapter to determine the value of a
share of stock? Comment on the reasonableness of these assumptions.
LO 1
7.5
Common versus Preferred Stock Suppose a company has a preferred
stock issue ond
[28] Choose the correct answer w/ explanation. FINEX Corporation has common and preferred shares outstanding that recently paid a dividend of PhP 10 per share. Which of the following is correct?
Both prices should be the same if markets are efficient and the required returns are the same
Both prices should be the same since the dividends are the same
The price of the common stock is expected to be higher if the required return on the common stock is lower than the required return on preferred stock
The price of the common stock will be lower if dividends are not expected to grow
Chapter 8 Solutions
Fundamentals of Corporate Finance
Ch. 8.1 - Prob. 8.1ACQCh. 8.1 - Does the value of a share of stock depend on how...Ch. 8.1 - What is the value of a share of stock when the...Ch. 8.2 - Prob. 8.2ACQCh. 8.2 - Prob. 8.2BCQCh. 8.2 - Why is preferred stock called preferred?Ch. 8.3 - Prob. 8.3ACQCh. 8.3 - Prob. 8.3BCQCh. 8.3 - How does NASDAQ differ from the NYSE?Ch. 8 - A stock is selling for 11.90 a share given a...
Ch. 8 - An 8 percent preferred stock sells for 54 a share....Ch. 8 - Prob. 8.3CTFCh. 8 - Stock Valuation [LO1] Why does the value of a...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Stock Valuation [LO1] A substantial percentage of...Ch. 8 - Dividend Growth Model [LO1] Under what two...Ch. 8 - Common versus Preferred Stock [LO1] Suppose a...Ch. 8 - Prob. 6CRCTCh. 8 - Growth Rate [LO1] In the context of the dividend...Ch. 8 - Prob. 8CRCTCh. 8 - Prob. 9CRCTCh. 8 - Prob. 10CRCTCh. 8 - Prob. 11CRCTCh. 8 - Two-Stage Dividend Growth Model [LO1] One of the...Ch. 8 - Prob. 13CRCTCh. 8 - Price Ratio Valuation [LO2] What are the...Ch. 8 - Stock Values [LO1] The JacksonTimberlake Wardrobe...Ch. 8 - Stock Values [LO1] The next dividend payment by...Ch. 8 - Stock Values [LO1] For the company in the previous...Ch. 8 - Stock Values [LO1] Caan Corporation will pay a...Ch. 8 - Stock Valuation [LO1] Tell Me Why Co. is expected...Ch. 8 - Stock Valuation [LO1] Suppose you know that a...Ch. 8 - Stock Valuation [LO1] Estes Park Corp. pays a...Ch. 8 - Valuing Preferred Stock [LO1] Moraine, Inc., has...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Prob. 11QPCh. 8 - Prob. 12QPCh. 8 - Stock Valuation and PS [LO2] TwitterMe, Inc., is a...Ch. 8 - Stock Valuation [LO1] Bayou Okra Farms just paid a...Ch. 8 - Prob. 15QPCh. 8 - Nonconstant Dividends [LO1] Maloney, Inc., has an...Ch. 8 - Nonconstant Dividends [LO1] Lohn Corporation is...Ch. 8 - Supernormal Growth [LO1] Synovec Co. is growing...Ch. 8 - Prob. 19QPCh. 8 - Prob. 20QPCh. 8 - Prob. 21QPCh. 8 - Valuing Preferred Stock [LO1] E-Eyes.com just...Ch. 8 - Prob. 23QPCh. 8 - Two-Stage Dividend Growth Model [LO1] A7X Corp....Ch. 8 - Two-Stage Dividend Growth Model [LO1] Navel County...Ch. 8 - Stock Valuation and PE [LO2] Summers Corp....Ch. 8 - Stock Valuation and PE [LO2] You have found the...Ch. 8 - Stock Valuation and PE [LO2] In the previous...Ch. 8 - Stock Valuation and PE [LO2] YGTB, Inc., currently...Ch. 8 - PE and Terminal Stock Price [LO2] In practice, a...Ch. 8 - Stock Valuation and PE [LO2] Fly Away, Inc., has...Ch. 8 - Prob. 32QPCh. 8 - Stock Valuation [LO1] Most corporations pay...Ch. 8 - Nonconstant Growth [LO1] Storico Co. just paid a...Ch. 8 - Nonconstant Growth [LO1] This ones a little...Ch. 8 - Constant Dividend Growth Model [LO1] Assume a...Ch. 8 - Two-Stage Dividend Growth [LO1] Regarding the...Ch. 8 - Prob. 38QPCh. 8 - Prob. 1MCh. 8 - Prob. 2MCh. 8 - What is the industry average priceearnings ratio?...Ch. 8 - Prob. 4MCh. 8 - Assume the companys growth rate slows to the...Ch. 8 - Prob. 6M
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- in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions. Common versus Preferred Stock Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a LO 1 7.5 share of the common?arrow_forward[EXCEL] Preferred stock valuation: The preferred stock of Axim Corp. is currently selling at $47.13. If the required rate of return is 12.2 percent, what is the dividend paid by this stock? Please use Excel.arrow_forwardA. What is the investor's required rate of return for Green Gadgets' stock? ________% (round to two decimal paces) B. Assuming that the investor's required rate of return for Green Gadget's stock does not change, what would you expect to happen to the price of its common stock if it cuts dividend to $3? $_______ (round to the nearest cent) C. Should Green Gadgeds cut its dividend? ( select from the drop down menus) Green Gadgets Should / Should not cut the dividend because cutting the dividend will increase / decrease the value of the common stock.arrow_forward
- 3.1-3.3 Corporation A's stock has a price of $50 at t=0. It is expected to pay a dividend of $2 at t=1 and its expected price at t=1 but right after paying the dividend is $52. 3.1 What is this stock's expected current yield?- 3.2 What is this stock's expected capital gain rate?- 3.3 What is this stock's equity cost of capital?arrow_forwardAll else equal, a higher required rate of return would reduce the price of: I. Corporate bondsII. Preferred stockIII. Common stock Select one: A. I only B. I and II only C. I and III only D. I, II, and IIIarrow_forwardWhich is the better investment: common stock par value of $10 per share, or common stock with no par value per share? Explain the rationale for your answerarrow_forward
- If the support and resistance levels of a stock are $15.15 and $15.60 and there has not been a break out or breach, what is the likely share price? O A. between $15.15 and $15.60 O B. below $15.15 O C. above $15.60arrow_forwardD6 Discuss buying back stock and splitting shares as ways in which the rate of return of stocks is affected. What is the scientific evidence on these issues?arrow_forwardN1 Assuming Kingsla Motors was on the stock exchange, why might it contemplate a share split if its sharer price grew substantially? Should doing a share split alter the total value of company (known as market capitalisation)?arrow_forward
- Required: 5. The average per-share sales price of the common stock when issue $? per share 6. The cost of the treasury stock per share $? per share 7. The total stockholders' equity $? 8. The per-share book value of the common stock assuming that there are no dividends in arrears and that the preferred stock can be redeemed at its par value $? per sharearrow_forward10. How much is the dividends per share for ordinary shareholders? a.2.00 b. 6.00 c. 20.00 11. How much is the dividends per share for preferred shareholders? a. 2.00 b. 6.00 c. 20.00 Show your solutionsarrow_forwardQuestion Help ▼ According to the Generalized Dividend Model, the final sales price of a stock depends on the following except the O A. price of the stock in the last period. OB. number of periods. OC. required retum on investments in equity. O D. dividend payments. If a company called Advanced Technologies has yet to pay a dividend on its stock, the generalized dividend model predicts that the company's stock may still have value because O A. people expect Advanced Technologies to pay dividends in the future. B. all companies that have any physical assets have value. OC. the required return on investment for high technology companies is zero. O D. all companies are legally required to pay dividends within ten years of the initial public offering of stock. Click to select your answer.arrow_forward
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