The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown): Type of asset/liability Market value Risk (beta) Cash holdings £20m 0 Fixed investments £180m ? Short term debt £10m 0 Long term debt £70m 0.05 Equity £120m 1.1 The risk-free rate is 3%, and the average return on the market index is 7%. The number of shares outstanding for DV Co is 100m. The corporate and investor tax rates are zero. Modigliani-Miller irrelevance of dividend policy and capital structure holds. What is the weighted average cost of capital (WACC) for DV Co? The company plans to pay a dividend per share of £0.10, which is funded by increasing the company’s long-term debt correspondingly. The new debt has the same beta as the old long-term debt. What is the value per share of the DV Co’s stock on ex-dividend day if the dividend payment goes ahead? What is the beta of the equity on ex-dividend day? Explain. Outline the leading theories on payout policy: irrelevance theory, theories based on asymmetric information, and theories on taxes and transaction costs.
The DestitutusVentis Company (DV Co) has the following items on its balance sheet (question mark means that the quantity is unknown): Type of asset/liability Market value Risk (beta) Cash holdings £20m 0 Fixed investments £180m ? Short term debt £10m 0 Long term debt £70m 0.05 Equity £120m 1.1 The risk-free rate is 3%, and the average return on the market index is 7%. The number of shares outstanding for DV Co is 100m. The corporate and investor tax rates are zero. Modigliani-Miller irrelevance of dividend policy and capital structure holds. What is the weighted average cost of capital (WACC) for DV Co? The company plans to pay a dividend per share of £0.10, which is funded by increasing the company’s long-term debt correspondingly. The new debt has the same beta as the old long-term debt. What is the value per share of the DV Co’s stock on ex-dividend day if the dividend payment goes ahead? What is the beta of the equity on ex-dividend day? Explain. Outline the leading theories on payout policy: irrelevance theory, theories based on asymmetric information, and theories on taxes and transaction costs.
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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Question
The DestitutusVentis Company (DV Co) has the following items on its
|
Type of asset/liability |
Market value |
Risk (beta) |
|
Cash holdings |
£20m |
0 |
|
Fixed investments |
£180m |
? |
|
Short term debt |
£10m |
0 |
|
Long term debt |
£70m |
0.05 |
|
Equity |
£120m |
1.1 |
The risk-free rate is 3%, and the average return on the market index is 7%. The number of shares outstanding for DV Co is 100m. The corporate and investor tax rates are zero. Modigliani-Miller irrelevance of dividend policy and capital structure holds.
- What is the weighted average cost of capital (WACC) for DV Co?
- The company plans to pay a dividend per share of £0.10, which is funded by increasing the company’s long-term debt correspondingly. The new debt has the same beta as the old long-term debt. What is the value per share of the DV Co’s stock on ex-dividend day if the dividend payment goes ahead?
- What is the beta of the equity on ex-dividend day? Explain.
- Outline the leading theories on payout policy: irrelevance theory, theories based on asymmetric information, and theories on taxes and transaction costs.
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