Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt. Who is likely to gain and who is likely to lose from the following maneuvers? a) Company X pays a cash dividend of $10M to its shareholders. b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).
Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt. Who is likely to gain and who is likely to lose from the following maneuvers? a) Company X pays a cash dividend of $10M to its shareholders. b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future
Who is likely to gain and who is likely to lose from the following maneuvers?
a) Company X pays a cash dividend of $10M to its shareholders.
b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).
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