Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 15, Problem 6MC
Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero
- (1) Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?
- (2) Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share?
- (3) Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Yale Corporation has a value of operations equal to P2,100, short-term investments of P100, debt of P200, and 100 shares of stock.
QUESTIONS:a. What is Yale's estimated intrinsic stock price? b. If Yale's converts its short-term investments to cash and pays a total of P100 in dividends, what is the resulting estimated intrinsic stock price? c. If Yale converts its short-term investments to cash and repurchases P100 of its stock, what is the resulting estimated intrinsic stock price and how many shares remain outstanding?
Give me accurate answer
The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places.)
The common stock and debt of Northern Sludge are valued at $80 million and $20 million, respectively. Investors currently require a 16.2% return on the common stock and a/an 7.5% return on the debt. If Northern Sludge issues an additional $11 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect…
Chapter 15 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 15 - Define each of the following terms: a. Optimal...Ch. 15 - How would each of the following changes tend to...Ch. 15 - What is the difference between a stock dividend...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Dividend Payout
The Wei Corporation expects next...Ch. 15 - Prob. 4PCh. 15 - Prob. 5P
Ch. 15 - Prob. 6PCh. 15 - Stock Split
Suppose you own 2,000 common shares of...Ch. 15 - Stock Split Fauver Enterprises declared a 3-for-1...Ch. 15 - Residual Distribution Policy Harris Company must...Ch. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Integrated Waveguide Technologies (IWT) is a...Ch. 15 - Prob. 2MCCh. 15 - Assume that IWT has completed its IPO and has a...Ch. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Suppose IWT has decided to distribute $50 million,...Ch. 15 - Prob. 7MCCh. 15 - Prob. 8MCCh. 15 - Prob. 9MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?arrow_forwardIf iOS Corp. issues an additional $8 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt, and recall that the WACC under the initial capital structure is 13.85%. Enter your answer as a percentage. Do not include the percentage sign in your answer. Enter your answer rounded to 2 DECIMAL PLACES. TE= Number Click "Verify" to proceed to the next part of the question.arrow_forwardCliff Corp (CC) has assets of $300 million including $25 million in cash. CC has 1 million share of stock outstanding and $70 million of debt. Assume capital markets are perfect. What is CC’s current debt-to-equity ratio? What is CC’s current stock price? If CC distributes $18 million in dividends, then what is the new ex- dividend share price? If instead of paying the dividend CC repurchases $18 million of stock, then what will be the new share price? What is the new debt-to-equity ratio after the payout?arrow_forward
- The common stock and debt of Northern Sludge are valued at $70 million and $30 million, respectively. Investors currently require a 16.0% return on the common stock and a/an 7.7% return on the debt. If Northern Sludge issues an additional $13 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the interest rate on Northern’s debt and that there are no taxes. a. What is the new return on equity?arrow_forwardSuppose Summa Industries and Cumma Technology have identical assets that generate identical cash flows. Summa Industries is an all-equity firm, with 12 million shares outstanding that trade for a price of $16.00 per share. Cumma Technology has 18 million shares outstanding, as well as debt of $57.60 million. a. According to MM Proposition I, what is the stock price for Cumma Technology? b. Suppose Cumma Technology stock currently trades for $10.74 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?arrow_forwardHawar International is a shipping firm with a current share price of $4.94 and 9.8 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.7 million and repurchasing shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent. a. If the only imperfection is corporate taxes, what will be the share price after this announcement? b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? a. If the only imperfection is corporate taxes, what will be the share price after this announcement? The share price after this announcement will be $ per share. (Round to the nearest cent.) b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this…arrow_forward
- Gamma Industries has net income of $3,800,000, and it has1,490,000 shares of common stock outstanding. The company’s stock currently trades at $67a share. Gamma is considering a plan in which it will use available cash to repurchase 10%of its shares in the open market at the current $67 stock price. The repurchase is expectedto have no effect on net income or the company’s P/E ratio. What will be its stock pricefollowing the stock repurchase?arrow_forwardSuppose Beta Industries and Delta Technology have identical assets that generate identical cash flows. Beta Industries is an all-equity firm, with 7 million shares outstanding that trade for a price of $16.00 per share. Delta Technology has 22 million shares outstanding, as well as debt of $33.60 million. a. According to MM Proposition I, what is the stock price for Delta Technology? b. Suppose Delta Technology stock currently trades for $8.27 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity? a. According to MM Proposition I, what is the stock price for Delta Technology? According to MM Proposition I, the stock price per share for Delta Technology is $ (Round to the nearest cent.)arrow_forwardXYZ Co. has 100,000 shares of stock outstanding; total current assets is P2,050,000, P455,000 of which is cash; total current liabilities is P900,000. There is no outstanding dividends payable. Assuming XYZ Co. maintains aminimum current ratio of 2 and that the above accounts will remain unchanged except cash, what is the maximum dividends per share that XYZ Co. can pay in cash? A. P2.50 B. P3.35 C. P3.80 D. P72.05 E. answer not givenarrow_forward
- BK Corporation has a value of operations equal to P2,100, short-term investments of P100, debt of P200, and 100 shares of stock. If BK converts its short-term investments to cash and repurchases P100 of its stock, what is the resulting estimated intrinsic stock price and how many shares remain outstanding?arrow_forwardThe Rivoli Company has no debt outstanding, and its financial position is given by the following data Expected EBIT Growth rate in EBIT, GL Cost of equity, rs Shares outstanding, no Tax rate, T (federal-plus-state) a. What is Rivoli's intrinsic value of operations (i.e., its unlevered value)? Round your answer to the nearest dollar. $ 6,000,000 What is its intrinsic stock price? Its earnings per share? Round your answers to the nearest cent. Intrinsic stock price: $ Earnings per share: $ 3 b. Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 35% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Based on the new capital structure, what is the new weighted average cost of capital? Round your answer to three decimal places. × % $ 30 $800,000 0% 10% 200,000 25% ✔ What is the levered value of the firm? What is the amount…arrow_forwardSuppose Beta Industries and Delta Technology have identical assets that generate identical cash flows. Beta Industries is an all-equity firm, with 13 million shares outstanding that trade for a price of $19.00 per share. Delta Technology has 23 million shares outstanding, as well as debt of $74.10 million. Suppose Delta Technology stock currently trades for $11.25 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity? If Delta Technology stock currently trades for $11.25 per share, an example of an arbitrage opportunity that exists today which requires no future cash flow obligations would be: Sell----million shares of-----at the current price of $------and buy-----million shares of---at the current price of $---and borrow $---million.(Round to two decimal places.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License