ABC Inc expects to have EPS (earning per share) of $5 in the coming year. The firms plan to pay all of its earning as a dividend. With this expectation of no growth the firm current share price is $50 per share. Suppose that ABC Inc decided to cut its dividend payout rate to 80% for the foreseeable future and use retaining earning for the new project. Return on this project is expected to be 15%. Assuming equity cost of capital is unchanged, what effect would this new policy have on ABC's stock (what is the new price)?
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![ABC Inc expects to have EPS (earning per share) of $5 in the coming year. The firms plan to pay
all of its earning as a dividend. With this expectation of no growth the firm current share price is $50
per share. Suppose that ABC Inc decided to cut its dividend payout rate to 80% for the foreseeable
future and use retaining earning for the new project. Return on this project is expected to be 15%.
Assuming equity cost of capital is unchanged, what effect would this new policy have on ABC's
stock (what is the new price)?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F13905165-4e8d-4adc-996d-6fd66a29dbd9%2Fedc90f7d-3c98-4cb2-a981-8fc9e3837d39%2Fpbea0w9_processed.png&w=3840&q=75)
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- A firm is considering a new project which would be similar in terms of risk to its existing projed The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shan outstanding with a current market price of GHe11 per share. Next year's dividend is expected be GHc1 per share and the firm estimates dividends will grow at 5% per year for the next sever years. The firm also has 150,000 preferred shares outstanding with a current market price GH¢10 per share. Dividend of GHe0.9 per share is paid on preferred stock. The firm has a total o GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. Th yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investmen of GHc500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: i Calculate the WACC for this project?…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return TE Project Cost 1 $2,000 16.00% 2 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…Brutus Co. expects an EPS of $15 per share next period. Currently, their blowback ratio is 0.5. However, the company has the opportunity to finance a new project that will earn an ROE of 11% by cutting its dividend to $5.00 per share. If the Brutus Co's expected stock return is 15%, should they cut dividends to make the new investment? O indifferent between the dividends and project O cut dividends to take the project O do NOT cut dividends to take the project O cannot say for sure
- Jacob Limited is evaluating investment opportunities with similar expected returns, which will require a total of N$35 million to finance. Last year (2020), a dividend of N$6 per share was paid. At present the shares are quoted at N$60 per share. A dividend growth of 9% per annum is expected for the foreseeable future. The company would realize N$60 per share on the new issue but would have to pay floatation cost of N$5 per share. In addition, 13% preference shares or 11% debentures could be issued. Any debenture issued would be offered at face value. Retained earnings are expected to amount to N$12 million in 2021. The following are the extract from the 2020 financial statements. These capital structure is based on book values and is considered optimal by the board of directors. Ordinary share capital N$ 23 000 000 Retained Earnings N$ 7 000 000 Total equity N$ 30 000 000 Preference share capital (11% p.a) N$ 9 000 000 Debenture (9% p.a) N$ 21…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $50.00 per share. Also, its common stock currently sells for $43.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $48.00 per share. Also, its common stock currently sells for $33.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…
- Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $52.00 per share. Also, its common stock currently sells for $34.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $56.00 per share. Also, its common stock currently sells for $43.00 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3 4 3,000 5,000 2,000 15.00 13.75 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $56.00 per share. Also, its common stock currently sells for $49.00 per share; the next expected dividend, D₁, is $5.75; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. % Cost of debt: Cost of preferred stock: Cost of retained earnings: % % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects…
- A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year’s dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm’s tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: Calculate the…A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year's dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: i. Calculate the…Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $57.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…
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