Want detailed explanation A well-established company has generated strongprofits and must now decide how to allocate excesscash. The management team is debating whether todistribute dividends to shareholders or reinvest theprofits into the company. Paying dividends can attractinvestors seeking income, but it reduces the company'sretained earnings for future growth opportunities.Alternatively, reinvesting in new projects, R&D, oracquisitions could enhance long-term value creation.However, shareholders might expect consistentdividend payouts, especially if the company has ahistory of doing so. The decision will depend on thecompany's growth prospects and shareholders'preferences. Should the company prioritizeshareholder returns or future growth opportunities?A balanced approach could involve paying a partialdividend while reinvesting a portion of the profits.

Explanation of Dividends:Dividends are payments that a company makes to its shareholders from its…

Answered: A well-established company has…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 21P

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Companies that face large investments they cannot finance internally through the retention of earnings must go to the financial market to raise the needed funds. When they do this, they will incur what are commonly referred to as floatation costs. Discuss how these floatation costs should be incorporated into the firm’s analysis of net present value
As a firm grows, it must support increases in revenue with new investments in assets. The self-supporting, or sustainable, growth model helps a firm assess how rapidly it can grow, while maintaining a balance between its cash outflows (increases in noncash assets) and inflows (funds resulting from ncreases in liabilities or equity). Consider the following case of Cold Duck Manufacturing Inc.: Cold Duck Manufacturing Inc. has no debt in its capital structure and has $200,000,000 in assets. Its sales revenues last year were $100,000,000 with a net income of $2,500,000. The company distributed $135,000 as dividends to its shareholders last year. Given the information above, what is Cold Duck Manufacturing Inc.'s sustainable growth rate? 0.56% 1.20% 0.07% 3.89% Which of the following are assumptions of the sustainable (self-supporting) growth model? Check all that apply. The firm maintains a constant net profit margin. The firm maintains a constant ratio of assets to equity. The firm uses…
WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company’s projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will increase in value. The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company should require. When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line. Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of…
WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will become more valuable. The firm's overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company requires. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is risk will be a good proxy for within-firm risk. Consider the case of another company: □ Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVS of $200,000. Management conducted a…
Which of the following is an example of a way in which companies can create value by exploiting real options? A.Exercising in-the-money real options immediately B.Optimally delaying or abadoning projects C.Abandoning good projects in favor of newer projects D.Acting quickly to take on the new projects even if there is no cost to wait
A company should accept for investment all positive NPV investment alternatives when which of the following conditions is true?a. The company has extremely limited resources for capital investment.b. The company has excess cash on its balance sheet.c. The company has virtually unlimited resources for capital investment.d. The company has limited resources for capital investment but is planning to issue new equity to finance additional capital investment.
Analysts and investors often use return on equity (ROE) to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company’s ROE numbers look good. A) If a firm takes steps that increase its expected future ROE, its stock price will increase. B) Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project? Project Y, with 40% ROE and a small investment, generating low expected cash flows Project X, with 35% ROE and a large investment, generating high expected cash flows C) Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company’s performance. If you wanted to conduct a comparative analysis for the current year, you would: Compare the…
The optimal capital structure: Multiple Choice will be the same for all companies within the same industry. will remain constant over time unless the company changes its primary operations. will vary over time as taxes and market conditions change. places more emphasis on operations than on financing. is unaffected by changes in the financial markets.
3. A company is exploring how to finance its expansion plans. It has the following options: Retain more of its net earnings. Borrow/issue more debt Issue additional shares or raise more equity (season public offerings) A combination of all the above. The financing decision of long-term projects is crucial because of agency relationships. Explain the role of information asymmetry and the agency problem in the financing of long-term plans of a company. In your briefing note your task is to make the board members of the company understand the implications of each form of financing.
Neptune Company offers network communications systems to computer users. The company is planning a major investment expansion but is unsure of the correct measure of equity capital as it has no traded equity. Your job is to determine the basis of the equity cost. List and explain the steps you will need to take. The
Which of the following statements is (are) FALSE? Select one or more alternatives: When sales of a new product displace sales of an existing product, the situation is often referred to as cannibalisation. If the IRR of a project is equal to the cost of capital, the NPV will be zero. It is reasonable to assume that a business has a terminal growth rate higher than the long-term growth rate of the economy. The terminal growth rate is the growth rate used to estimate the terminal value of a business. Interest expenses from borrowing should be subtracted from EBIT to estimate free cash flow to firm.
The firm's self-supporting growth rate is influenced by the firm's capital intensity ratio. The more assets the firm requires to achieve a certain sales level, the lower its sustainable growth rate will be. Many experts argue that it is better for an organization to grow organically or by putting the money back into the business and not taking on debt. Consider your own organization that you currently work for or have worked for in the past. What is their approach to growing the business? How would you advise your company based on what you have learned this week in terms of self-supporting growth?

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