The management of a conservative firm has adopted a policy of never letting debt exceed 40 percent of total financing. The firm will earn $10,000,000 butdistribute 50 percent in dividends, so the firm wil have $5,000,000 to add to retained earnings. Currently the price of the stock is $40; the company Days a54 per share dividend, which is expected to grow annualy at 9 percent. If the compary sells new shares, the oet to the company will be $36. Given thisInformation, what is the

Let's examine the computations in further detail: 1. Target Capital Structure: According to…

Answered: The management of a conservative firm…

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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John Inc. had recently announced $3 earnings per share and the continuation of 30% return on equity. They will also continue their 80% dividend payout ratio. The stock discount rate is 16%. a. Assuming the payout ratio will continue indefinitely and that the return on equity will not change; calculate the Jedi stock price. b. Management considers continental expansion. For that purpose, they will have to reduce the dividend payout ratio for ten years to 20%, after which they will return it to 80% indefinitely; Calculate the stock price if they follow through with that plan. c. Management considers aggressive worldwide expansion. For that purpose, they will eliminate dividends payout for eight years, after which they will return it to 80% indefinitely; Calculate the stock price if they follow through with that plan.
Use the following information for questions 17 and 18: Powell Plastics, Inc. (PP) currently has zero debt. Its free cash flow last year was $48,000, and it is a zero growth company. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. PP is considering moving to a capital structure that is comprised of 30% debt and 70% equity. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations? O $487,805 $505,524 O $525,173 O $734,634 O $813,008
The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $20,000,000 but distribute 30 percent in dividends, so the firm will have $14,000,000 to add to retained earnings. Currently the price of the stock is $60; the company pays a $5 per share dividend, which is expected to grow annually at 9 percent. If the company sells new shares, the net to the company will be $55. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. % The rate of interest on the firm’s long-term debt is 9 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,100,000, the interest rate will rise to 10 percent. Given this information, what is the cost of debt? Round your answer to one decimal place. % cost of debt in excess of $2,100,000? Round your answer to one…
n Tina Black's Fabrics is currently an all equity firm that has 15,000 shares of stock outstanding at a market price of $12.50 a share. Company management has decided to issue $60,000 worth of debt and use the funds to repurchase shares of the outstanding stock at the market price. The interest rate on the debt will be 7%. Ignoring taxes, what is the earnings per share (EPS) at the break-even level of earnings before interest and taxes (EBIT)? O A. O B. O D. $1.143 O C. $1.500 SOE. $1.125 $0.875 $0.667 27/
Sunnyfax Publishing pays out all its earnings and has a share price of $37.00. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 14%. If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision? O $45.87 $40.14 $68.81 $57.34 Suppose a ten-year, $1,000 bond with an 8.6% coupon rate and semiannual coupons is trading for $1,035.39. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)? 8.08% O4.04% O 5.36% O 10.72%

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