b. Suria Motors Bhd. is an all-equity firm (i.e. no debt) with 200,000 shares outstanding. The company's EBIT is RM2,000,000, and EBIT is expected to remain constant over time (i.e. g = 0%). The company pays out all of its earnings each year as dividend, so its earnings per share (EPS) equal its dividends per share (DPS). The company's tax rate is 40 percent. The company is considering issuing RM2 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 10 percent. The risk-free rate in the economy is 6.6 percent, and the market risk premium is 6 percent. The company's beta is currently 0.9, but its investment bankers estimate that the company's beta would rise to 1.1 if it proceeds with the recapitalization. Assume that the shares are repurchased at a price equal to the stock market price prior to the recapitalization.

b. Suria Motors Bhd. is an all-equity firm (i.e. no debt) with 200,000 shares outstanding. The company's EBIT is RM2,000,000, and EBIT is expected to remain constant over time (i.e. g = 0%). The company pays out all of its earnings each year as dividend, so its earnings per share (EPS) equal its dividends per share (DPS). The company's tax rate is 40 percent. The company is considering issuing RM2 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 10 percent. The risk-free rate in the economy is 6.6 percent, and the market risk premium is 6 percent. The company's beta is currently 0.9, but its investment bankers estimate that the company's beta would rise to 1.1 if it proceeds with the recapitalization. Assume that the shares are repurchased at a price equal to the stock market price prior to the recapitalization.

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

See similar textbooks

Similar questions

Chella Vibes Industries capital structure consists solely of debt and common equity. It can issue debt at 11%, and its common stock paid a dividend of $1.50. The stock’s price is currently $22.30, its dividend is expected to grow at a constant rate of 5% per year, its tax rate is 40%, and its WACC is 10.56%. What percentage of the company’s capital structure consists of debt and common equity (ie: what are the weights of debt and common equity)?
ABC Corporation will be investing in X Corporation shares. X provided dividends of 45 per share last year. ABC requires a return of 15% but expects X to have an equity growth rate of 9%. If ABC paid 800 for each share of X, how much did ABC over/under pay?
Blue Co., a firm that grows at a constant rate of 5%, is trying to estimate its weighted average cost of capital. Blue Co. recently paid a P5 per share dividends to its outstanding ordinary shares. The ordinary share of the firm is currently trading at a price of P52.50. What is the cost of equity of the company that will be used for the purpose of determining the weighted average cost of capital? (In percentage, put percentage sign)
Balling Limited is a company listed on the NZX. Balling has announced it will make a dividend payment at the end of the year of $1.75 per share. The average annual growth rate in the company’s dividends over the past five years has been 5%. Balling’s shareholders have a required rate of return of 15%p.a. Balling’s shares have been trading very consistently around $20 per share for the past few months and analysts suggest this is likely to continue for the foreseeable future. How can you explain this price based on the constant growth dividend discount model?
Carlton Containers has a dividend policy whereby the firm pays a constant annual dividend of $1.95 per share of common stock. The firm has 10,000 shares of stock outstanding. The company ??? - must always show a current liability of $19,500 ($1.95 x 1,000) for dividends payable. - is obligated to pay $1.95 per share each year in perpetuity. - must still declare each dividend before it becomes an actual company liability. - will be declared in default if it does not pay at least $1.95 per share per year on a timely basis. - has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
Assume that your company is an all-equity firm with 250,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share are equal to its dividends per share and this is currently $6.00 per share. The company's tax rate is 40 percent, its current cost of stock, Ks, is 8 percent, and its current stock price is $75 per share. Now assume that the company is considering issuing $3.75 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 5 percent or interest of $187,500. The risk-free rate in the economy is 4 percent, and the market risk premium is 5 percent. The company's beta is currently 0.8, but its investment bankers estimate that the company's beta would rise to 0.9 if it proceeds with the recapitalization. Assume that the shares are repurchased at the equilibrium price that…
Maji maji Limited had earnings attributable to ordinary shareholders equal to Ksh. 8,800,000. The firm has 1,100,000 ordinary shares outstanding and a payout policy of 60%. The required rate of return by ordinary shareholders is16%. Required: a) Compute the theoretical value of a share in case of a zero growth firm b) The value of a share if a growth rate of 7% p.a. in perpetuity is expected c) The firm expects a growth rate of 20% p.a. for the first three years, 10% for the next four years and 7% p.a. from year 8 to perpetuity
Little Oil has outstanding 1 million shares with a total market value of $29 million. The firm is expected to pay $1.00 million of dividends next year, and thereafter, the amount paid out is expected to grow by 5% a year in perpetuity. Thus, the expected dividend is $1.05 million in year 2, $1.1025 million in year 3, and so on. However, the company has heard that the value of a share depends on the flow of dividends, and therefore, it announces that next year's dividend will be increased to $2 million and that the extra cash will be raised immediately afterward by an issue of shares. After that, the total amount paid out each year will be as previously forecasted, that is, $1.05 million in year 2 and increasing by 5% in each subsequent year. A. At what price will the new shares be issued in year 1? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. B. How many shares will the firm need to issue? Note: Do not round intermediate calculations. Round your…
J Aaron Inc. has 307 million shares outstanding. It expects earnings at the end of the year to be $570 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and 20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 5% per year, what is Aaron's share price? OA. $9.29 OB. $27.86 OC. $18.57 OD. $37.14

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS