EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 23P
a.
Summary Introduction
To determine: The share price of the stocks.
Introduction:
Share price: The current share price is also known market value of single share which is currently being sold or bought in the market; basically, it is price that a security is last traded.
In a company, shares are a unit of ownership interest. The individual who owns shares are called as shareholders. Shares can be classified into equity
b.
Summary Introduction
To determine: The cost of the plan for ZE and the reason why issuing equity is expensive.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You have estimated the current-year EBITDA of Mallock Transportation for a potential buyer of the firm, and you have discovered that the CEO of Mallock, who owns 90% of the firm, is taking a salary that is at least $100,000 higher than the cost of an outsider that could be hired to run the firm. The CEO will retire upon the sale, and the firm expects no loss in revenue since clients have signed long-term contracts that will be difficult to cancel. You adjust EBITDA to account for the CEOs replacement. The adjustment is called:
a.
Fraud
b.
Business judgment
c.
Accounting under GAAP
d.
Normalizing EBITDA
e.
None of the above
On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. (A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place.)
Date
Market Return(%)
CompanyReturn (%)
Nov 7
1.0
.6
Nov 8
.8
.6
Nov 9
−.7
−.1
Nov 10
−.6
−.3
Nov 11
1.8
1.0
Nov 14
−.6
2.3
Nov 15
.1
.1
Nov 16
.9
1.2
Nov 17
.7
.8
Nov 18
−.7
.0
Nov 21
.8
.2
On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved.
Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous
severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume
the company has an expected return equal to the market return.
Note: A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "O" wherever required. Do
not round intermediate calculations. Round your answers to 1 decimal place.
Market
Return (%) Return (%)
Company
Date
November 7
0.8
0.4
November 8
0.6
0.4
November 9
-0.5
-0.3
November 10
-0.6
-0.5
November 11
1.6
1.0
November 14
-0.4
2.1
November 15
0.1
0.1
November 16
0.9
1.0
November 17
0.5
0.6
November 18
-0.5
0.0
November 21
0.6
0.2
Days from
Announcement
-5
-4
-3
-2
-1
0
1
2
3
4
5
Daily Abnormal
Return
Cumulative Abnormal…
Chapter 14 Solutions
EBK CORPORATE FINANCE
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
Knowledge Booster
Similar questions
- On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. Note: A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to 1 decimal place. Market Return (%) Company Return (%) Date November 7 1.3 0.9 November 8 1.1 0.9 November 9 -1.0 -0.4 November 10 -0.6 -0.6 November 11 2.1 1.0 November 14 -0.9 2.6 November 15 0.1 0.1 November 16 0.9 1.5 November 17 1.0 0.4 November 18 -1.0 0.0 November 21 1.1 0.2 Days from Announcement Daily Abnormal Cumulative Abnormal Return Return -5 -0.4 -0.4 -4…arrow_forwardOn November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. Graph and interpret your results.arrow_forwardWhich of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? a. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. b. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. c. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. d. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. e. Congress passes a law that severely restricts hostile takeovers.arrow_forward
- On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. Note: A negative velue should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculetions. Round your answers to 1 decimal place. Market Return Date November 7 (K) Company Return (%) 1.3 0.9 November 1.1 0.9 November 9 -1.0 -0.4 November 10 -4.6 -0.6 November 11 2.1 1.0 November 14 4.3 2.6 November 15 0.1 0.1 November 16 1.5 November 17 0.4 November 18 November 21 -1.0 0.0 0.2 Days from nouncement 7 2 3 Dailly Abnormal Return Cumulative Abnormal Returnarrow_forwardDue to the highly specialized nature of the electronic industry, Barret Industries invests a lot of money in R$D on prospective products. Consequently, it retains all of its earnings and reinvests them into the firm.( In other words, it does not pay dividends). At this time, Barret does not have plans to pay any dividends in the near future. A major pension fund is interested in purchasing Barrett's stock, which is traded on the NYSE. The treasurer of the pension fund has done a great deal of research on the company and realizes that its valuation must be based on the total company model(free cash flows approach). The pension fund's treasurer has estimated Barrett's free cash flows for the next 4 years as follows: $3million, $6million, $10million, and $15million. After the fourth year, free cash flow is projected to grow at a constant 7%. Barrett's WACC is 12%; it has $60million of total debt and preferred stock, and $10millon shares of common stock. Required: I). Determine the Present…arrow_forwardThe Beranek Company, whose stock price is now $20, needs to raise $30 million in common stock. Underwriters have informed the firm's management that they must price the new issue to the public at $16 per share because of signaling effects. The underwriters' compensation will be 4% of the issue price, so Beranek will net $15.36 per share. The firm will also incur expenses in the amount of $190,000. How many shares must the firm sell to net $30 million after underwriting and flotation expenses? Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest whole number.arrow_forward
- Reed Kohler is in his final year of employment as controller for Quality Sales Corporation: he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm's net income before bonus and income taxes - the larger the net income, the larger the bonus. Due to a slowdown in the economy due to Coronavirus, the company has encountered difficulty in managing its cash flow. The company auditors have recommended that the company change its inventory method from FIFO to LIFO . The change would cause a significant increase in the cost of goods sold for the year. Kohler thinks the company shouldn't switch to LIFO b/c its inventory quantities are too large. After expressing this opinion to the firm's treasurer, Kohler is stunned at the treasurer's reply "Reed, I can't believe that after all these years with the company, you put your personal interests ahead of the companies…arrow_forward(Calculating the ex-dividend stock price) Kingwood Corporation has a stock price of $115.62 per share and is contemplating the payment of a large, one-time cash dividend of $40.39 per share. The underlying motivation for the large payout comes from management's belief that the firm has more cash than it can profitably reinvest and that keeping the cash will adversely affect the incentives of the workforce to strive to create shareholder value. Consequently, the firm's management decided to pay the large cash dividend. What do you think the ex-dividend-date price of the company's shares will be? If the firm's management is right about the stimulating effect of disgorging cash, do you think that the drop in stock price after the ex-dividend date will be smaller than otherwise expected? a. The ex-dividend date price of the company's shares will be $ : (Round to the nearest cent.) b. If the firm's management is right about the stimulating effect of disgorging cash, do you think that the…arrow_forwardYou are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $60 million of GreenFrame's value, but the present value of the CEO's compensation increases by $6.5 million, will he be better or worse off? The CEO will be ____because his wealth has changed by $ million.arrow_forward
- You work as the CEO of StarBright Berhad, and the company is facing the threat of a buyout by StarZip Berhad. Your company stock price is currently trading at RM1.80. StarZip Berhad announced its interest in buying StarBright Berhad with the offer price of RM2.40. Your management is unhappy with the offer price and is against the takeover. With the full support from your management, you are fighting to prevent the takeover by StarZip Berhad. Are you acting in the best interest of the shareholders? Explain.arrow_forwardHunger Industries operated as a monopolist for the past several years, earning annual profits amounting to $40 million, which it could have maintained if Munch Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Hunger Industries now earns $20 million annually. The managers of Hunger Industries are trying to devise a plan to drive Munch Incorporated out of the market so Hunger can regain its monopoly position (and profit). One of Hunger's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $100 million, Ignoring antitrust concerns, if Hunger Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits is Multiple Choice *** MAVE $900 million -$100 million. $1,900 milion $2,040 milionarrow_forwardMr. Handsome is interested in the UGLY stock. He finds that the price should be $3, but the market price is $5 per share now. Mr. Handsome has $2,000 in his margin account. The initial margin requirement is 40%, and the maintenance margin is 30%. Assume there are no interests and service charges. Mr. Handsome covers his short position at $4 and deposits all proceeds to his margin account. But he still thinks the price will decrease to $3. So he short again as many shares as possible. After this transaction, Company UGLY receives a great donation. So its stock price increases to $5. Mr. Handsome has to cover his short position. Then how much is left in his margin account? More than or less than his initial funds? Can you provide any intuition for your answer?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
