Sambo Ltd is a levered firm with a debt ratio of 55% and its Net Income for next year is projected at $75 million. There are 12 million shares outstanding at a price of $27.47 per share. Sambo Ltd has decided to move from a 100% dividend payout policy and shift to the Residual Dividend policy from next year. a) What is the EPS and DPS for Sambo under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million, would Sambo Ltd be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Ignore taxes. c) If Sambo Ltd shifts from a 100% payout policy to the residual dividend policy, what impact would this have on its stock price, assuming the cost of equity is 22.75% and the dividend growth rate is projected at 5%? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated through this computation? (Assume constant growth rate stock valuation model for computing stock price)

Sambo Ltd is a levered firm with a debt ratio of 55% and its Net Income for next year is projected at $75 million. There are 12 million shares outstanding at a price of $27.47 per share. Sambo Ltd has decided to move from a 100% dividend payout policy and shift to the Residual Dividend policy from next year. a) What is the EPS and DPS for Sambo under the 100% dividend payout policy? b) If the planned capital outlay is for $72 million, would Sambo Ltd be able to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share? Ignore taxes. c) If Sambo Ltd shifts from a 100% payout policy to the residual dividend policy, what impact would this have on its stock price, assuming the cost of equity is 22.75% and the dividend growth rate is projected at 5%? Support your argument through relevant computations. Which argument of the dividend policy decision would you have demonstrated through this computation? (Assume constant growth rate stock valuation model for computing stock price)

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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Assume that company A wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of $21 per share and no debt. A has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $50 million on a permanent basis and they will use the borrowed funds to repurchase outstanding shares. If shareholders are perfectly rational and informed, what will the repurchase price per share be (keep two decimal places and assume that the new borrowing will not have any negative effects)?
Bulldogs Inc. has forecasted that its net income will be P520,000. The company has an debt-to-equity ratio of 25%. The dividend policy of the firm follows the residual dividend model. Bulldogs Inc. has a project that needs funding amounting to P600,000. The number of issued and outstanding shares of Bulldogs Inc. is 5,000. How much of the project must be funded by equity?
Cooperton Mining just announced it will cut its dividend from $3.95 to $2.34 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.5% rate, and its share price was $50.67. With the planned expansion, Cooperton's dividends are expected to grow at a 4.8% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $. (Round to the nearest cent.)
Cooperton Mining just announced it will cut its dividend from $4.25 to $2.29 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.1% rate, and its share price was $50.34. With the planned expansion, Cooperton's dividends are expected to grow at a 4.9% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $. (Round to the nearest cent.) Is the expansion a good investment? (Select from the drop-down menu.) a good investment.
ABC Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50% and the tax rate is 40%. The target capital structure consist of debt and 55% common equity. What is the companys WACC if all the equity used is from retained earnings?
The net income of Progressive Corporation is $92,000. The company has 25,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,790,000. The appropriate discount rate for the company is 11 percent and the dividend tax rate is zero. a. What is the current value of the firm assuming the current dividend has not yet been paid? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the ex-dividend price of the company's stock if the board follows its current policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Current value of the firm b. Share price
RAFA Corp. is considering to issue new shares with a par value of P1,000, issue price of P1,200 and net proceeds of 1,050. Shareholders expect dividends of P80 per share for the first year and a growth rate of 4%. It may also use retained earnings as an alternative source of financing? Choosing the better alternative of the two, what would the incremental cost of capital be for RAFA? * 11.619 10.667 12.000 7.924
Blue Corp. is evaluating an extra dividend versus a share repurchase. In either case, $5,500 would be spent. Current earnings are $1.11 per share and the stock currently sells for $42 per share. There are 2,500 shares outstanding. Ignore taxes and other imperfections. If Blue Corp. pays a dividend, what will be the dividend per share? After the dividend is paid, how many shares will be outstanding and what will the price per share be? Enter your answers rounded to 2 DECIMAL PLACES. NOTE: Fractional shares are possible (Ex. 0.49 shares) Dividend 2.2 ☑ Correct response: 2.2±0.01 Shares outstanding = 2500 Correct response: 2,500 Stock price = 39.8 Correct response: 39.8±0.01 Click "Verify" to proceed to the next part of the question. After the $2.2 dividend, the price falls to $39.8 per share. What are earnings per share (EPS) and the price earnings (P/E) ratio? Enter your answers rounded to 2 DECIMAL PLACES. EPS = Number P/E RatioNumber Click "Verify" to proceed to the next part of the…
REH Corporation's most recent dividend was $2.82 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety of proposals 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 8% 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 17%. d. Merge with another firm, which will reduce the growth rate to 2% and raise the required return to 18%. e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 9% and increase the required return to 17%.
BTC has 15M shares in an all-equity firm, at a price of $13 per share. The firm announced that they will borrow $100M to buy back shares (using the full amount of debt). They will keep this debt permanently. Upon announcement the share price increases to $16 per share. The corporate tax rate is 25%, taxes and financial distress costs are the only relevant market imperfections. What is the present value of the financial distress costs？
Cooperton Mining just announced it will cut its dividend from $3.92 to $2.43 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.1% rate, and its share price was $51.64. With the planned expansion, Cooperton's dividends are expected to grow at a 4.7% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $. (Round to the nearest cent.)
Cooperton Mining just announced it will cut its dividend from $4.03 to $2.69 per share and use the extra funds to expand. Prior to the announcement, Cooperton's dividends were expected to grow at a 3.3% rate, and its share price was $48.51. With the planned expansion, Cooperton's dividends are expected to grow at a 4.6% rate. What share price would you expect after the announcement? (Assume that the new expansion does not change Cooperton's risk.) Is the expansion a good investment? The new price for Cooperton's stock will be $ (Round to the nearest cent.)

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