Management action and stock value REH Corporation's most recent dividend was $1.79 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety ofproposals are being considered by management to redirect the firm's activities. Determine the impact on share price for each of the following proposed actions.a. Do nothing, which will leave the key financial variables unchanged.b. Invest in a new machine that will increase the dividend growth rate to 7% and lower the required return to 13%.c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 9% and raise the required return to 16%.d. Merge with another firm, which will reduce the growth rate to 2% and raise the required return to 16%.e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 8% and increase the required return to 16%....a. If the firm does nothing that will leave the key financial variables unchanged, the value of the firm will be $(Round to the nearest cent.)b. If the firm invests in a new machine that will increase the dividend growth rate to 7% and lower the required return to 13%, the value of the firm will be $(Round to the nearest cent.)c. If the firm eliminates an unprofitable product line that will increase the dividend growth rate to 9% and raise the required return to 16%, the value of the firm will be $. (Round to the nearest cent.)d. If the firm merges with another firm that will reduce the growth rate to 2% and raise the required return to 16%, the value of the firm will be $(Round to the nearest cent.)e. If the firm acquires a subsid1ary operation from another manufacturer that will increase the dividend growth rate to 8% and increase the required return to 16%, the value of the firm will be $. (Round to thenearest cent.)

Dividend discount model refers to a stock valuation model which is used by the company for…

a. If the firm does nothing that will leave the key financial variables unchanged, the value of the firm will be $ (Round to the nearest cent.) b. If the firm invests in a new machine that will increase the dividend growth rate to 7% and lower the required return to 13%, the value of the firm will be $ (Round to the nearest cent.) c. If the firm eliminates an unprofitable product line that will increase the dividend growth rate to 9% and raise the required return to 16%, the value of the firm will be $. (Round to the nearest cent.)

a. If the firm does nothing that will leave the key financial variables unchanged, the value of the firm will be $ (Round to the nearest cent.) b. If the firm invests in a new machine that will increase the dividend growth rate to 7% and lower the required return to 13%, the value of the firm will be $ (Round to the nearest cent.) c. If the firm eliminates an unprofitable product line that will increase the dividend growth rate to 9% and raise the required return to 16%, the value of the firm will be $. (Round to the nearest cent.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Which of the following statements is false? A. Real assets generate net-income to the society. B. In most societies, resources are allocated not by an all-powerful dictator, but through the combined choices of millions of households and firms. C. Liabilities sacrifice future benefits. D. Leveraged buyouts (LBOs) are the most common type of commodity investment strategies.
None
Which statement below is incorrect? Select one: A. Compared to interview, survey is more suitable to ask standardised questions. B. If a firm has more intangible assets, according to the trade-off theory, it is more likely to have a higher leverage. C. If a firm is more profitable, according to the pecking order theory, it should use less debt for financing. D. The CAPM model implies that a stock with a higher beta has a higher return on average.
8. Which of the following does the trade-off theory predict? A. Bankruptcy costs mean having no debt is always optimal. B. Reducing leverage always reduces firm value. C. In the long run the firm's capital structure converges to the optimal one. D. None of the above.
A firm wants to reduce its cash conversion cycle sharply. Which of the following actions should it take? a. The company increases its average inventory without increasing its sales. b. The company increases its DSO (days sales outstanding). c. The company increases its average accounts payable without reducing its sales. d. The company sells an issue of long-term bonds and uses the proceeds to buy back some of its common stock.
A6) Finance 1. What of the following statements is not correct? _____ the higher the sales growth rate g is, the larger AFN will be—other things held constant. The higher the capital intensity ratio, the larger AFN will be—other things held constant. The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant. The higher the payout ratio, the larger AFN will be if other things held constant.
If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and common stock and add them to the initial investment cost. Because the investment cost is increased, the project's expected rate of return is reduced so it may not meet the firm's hurdle rate for acceptance of the project. The second approach involves adjusting the cost of common equity as follows: Cost of equity from new stock = r, D1 +8 Po(1-F) The difference between the flotation-adjusted cost of equity and the cost of equity calculated without the flotation adjustment represents the flotation cost adjustment. Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1.90 and it expects dividends to grow at a constant rate g = 4.3%. The firm's current common stock price, Po, is $25.00. If it needs to issue…
As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock. Consider the case of Portman Industries: Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 12.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 2.40% per year. Assuming that the market is in equilibrium, use the information just given to complete the table. Term Dividends one year from now (D1) Horizon value (P1) Intrinsic value of Portman's stock Value The risk-free rate (TRF) is 3.00%, the market risk premium (RPM) is 3.60%, and Portman's beta is 1.70.…
Give your thoughts on the prompts below Firms use market capitalization when considering the market value added. We have seen that a number of things can affect capitalization values, so is this really the best method to use? A well known company recently had a 20-1 stock split that drew a lot of attention...how does this affect their market value added? Administrative errors can have a big impact in receivables turnover and payment delay ratios, so companies should include administrative and other indirect costs in the calculations of those ratios. Agree or Disagree and defend your answer.
hich of the following best describes the sustainable growth rate? The minimum growth rate that can be achieved without raising external funds The maximum growth rate that can be achieved without raising external funds The minimum growth rate that can be achieved while maintaining the firm's dividend policy The maximum growth rate that can be achieved while maintaining the firm's dividend policy
Modigliani and Miller suggest that, under certain assumptions, financing decisions do not matter in that they do not affect the value of the firm. They define when these assumptions hold as perfect markets. Which of the following are assumptions that they claim must hold for financing decisions to be irrelevant? Group of answer choices There are no taxes There are no transaction costs The firm has a fixed investment policy The sun must rise in the North and set in the South

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