Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 16, Problem 23PS
Repurchases and the DCF model Hors d’Age Cheeseworks has been paying a regular cash dividend of $4 per share each year for over a decade. The company is paying out all its earnings as dividends and is not expected to grow. There are 100,000 shares outstanding selling for $80 per share. The company has sufficient cash on hand to pay the next annual dividend.
Suppose that, starting in year 1, Hors d’Age decides to cut its cash dividend to zero and announces that it will repurchase shares instead.
- a. What is the immediate stock price reaction? Ignore taxes, and assume that the repurchase program conveys no information about operating profitability or business risk.
- b. How many shares will Hors d’Age purchase?
- c. Project and compare future stock prices for the old and new policies. Do this for years 1, 2, and 3.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table
below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the
next year. The current market value for the debt is $67 million. The tax rate is zero. If you invest in the
corporate debt of Happy Time Inc. today, what is your expected percentage return on this investment?
Cash flow in the next year
Economy Probability Amount
Boom
0.3
Normal 0.4
Recession 0.3
O 36.87%
O -26.37%
64.8%
O-16.63%
$110 million
$101 million
$61 million
Melissa’s Kitchen is considering acquiring Takeshi’s Takeout Corp., a small local restaurant chain. Expected net cash flows from the acquisition for the first four years of the post-merger period are:
Year 1 $350,000
Year 2 $400,000
Year 3 $475,000
Year 4 $550,000
After four years, the net cash flows are expected to grow at a constant rate of 3 percent per year. If we know the following information, what is the most Melissa’s Kitchen Should pay for Takeshi’s Takeout?
Melissa’s Kitchen
Borrowing costs 5% above the current long-term Treasury Bond rate
10-year T-Bond Rate 2/8/23 = 3.64%
Beta 2.4
Debt $4 million
Stock 500,000 shares outstanding - $20 per share on 2/8/23
Tax Rate 21 percent
Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent
equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent
for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60
percent equity, according to M&M Proposition 1, what are the interest payments that you receive after you undo the restructuring,
and what are your total cash flows? (Do not round intermediate calculations. Round the final answer to two decimal places.)
O $1.58 and $12.38
O $23.55 and $75
O $1.125 and $12.38
O $23.55 and $12.38
Chapter 16 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 16 - Prob. 1PSCh. 16 - Company dividend policy Here are several facts...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 3. Assume...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Dividends and stock price Go back to the first...Ch. 16 - Prob. 7PSCh. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Prob. 9PSCh. 16 - Payout and taxes Which of the following U.S....
Ch. 16 - Prob. 11PSCh. 16 - Prob. 13PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Prob. 16PSCh. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Prob. 19PSCh. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Prob. 21PSCh. 16 - Prob. 22PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Prob. 25PSCh. 16 - Information content of dividends Generous dividend...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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
- Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?arrow_forwardAn investment of $491,588 (today) by a company results in a series of payouts over the next 10 years. Each of the payouts is 680,254. These payouts start decreasing by $1,642 per year starting from year 4. What is the AW of this situation given a discount rate of 6.5%? And what is the IRR for the AW. Show your work(Do not use excel) make sure you write it down and draw the specific diagrams related to it.arrow_forwardCede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 10 percent. The tax rate is 23 percent. If the company borrows $185,000 and uses the proceeds to buy back equity, what is the weighted average cost of capital after the recapitalisation is complete? O 15.13% O 9.67% O 14.32% O 8.17%arrow_forward
- Marbury Inc. owns several Newspapers and TV stations in the Southeast. Marbury plans to sell off its newspapers over the next two years and then will focus entirely on TV. In doing so, Marbury plans to have Cash Flows of $500 million this coming year, $300 million the following year, and then earn $100 million per year forever after that. Assuming a 7% discount rate, what is the DCF value of Marbury?arrow_forwardThe table below shows the forecast cash flow information of Good Time Inc. for the next year. The required debt payment in the next year is $88 million, with the current market value of $75 million. The company pays no tax. If you invest in the corporate debt of Good Time Inc. today, what is your expected return on this investment? Cash flow in the next year Economy Probability Amount Boom 0.6 $148 million Recession 0.4 I$61 million O 18.77% O 10.29% O 2.93% O 28.67%arrow_forwardSouthern tours os considering acquiring holiday vacations. Management believes holiday vacation can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, resp. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maxim southern tours should pay today to acquire holiday vacations?arrow_forward
- Cede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 10 percent. The tax rate is 23 percent. If the company borrows $185,000 and uses the proceeds to buy back equity, what is the weighted average cost of capital after the recapitalisation is complete? Group of answer choices 9.67% 15.13% 14.32% 8.17%arrow_forwardNugent Communication Corp. is investing $8,501,547 in new technologies. The company expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years. Year 1 2 3 4-7 Cash Flows $1,736,907 $4,841,362 $2,794,697 $1,009,125 What is the discounted payback period for the project assuming a discount rate of 10 percent?arrow_forwardA new company estimates that by investing in a new process, it will increase its sales by $2 million one and half year from now and a further $1.5 million two year from now. Assume interest rate of 18% per year, compounded semiannually. Please write formula, use compound interest table for extracting factors, show your solution step by step. a) Draw cash flow diagram What is the maximum amount the company can afford to spend now on the new process in order to break b) even? Compare PP and CP and use first method (determine effective rate per compounding period).arrow_forward
- The table below shows the forecast cash flow information of Good Time Inc. for the nextyear. The required debt payment in the next year is $88 million, with a current market valueof $60 million. The company pays no tax. If you invest in the corporate debt of Good TimeInc. today, what is your expected return on this investment? hand write pleasearrow_forwardNugent Communication Corp. is investing $7,311,256 in new technologies. The company expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant benefits in each of the next four years. Year 1 2 3 4-7 Cash Flows $2,540,230 $3,617,345 $2,867,006 $1,505,500 What is the discounted payback period for the project assuming a discount rate of 10 percent? (Round answer to 2 decimal places, e.g. 15.25. If discounted payback period exceeds life of the project, enter 0 for the answer.) The discounted payback period for the project is ___________arrow_forward6. A report from the marketing department indicates that a new product will generate the following revenue stream: P62,500 in the first year, P89,400 in year two, P136,200 in year three, P128,300 in year four, and P112,000 in year five. If your firm's discount rate is 11% and the cash flows are received at the end of each year, what is the present value of this cash flow stream? a.P379,435.35b.P421,173.24c.P476,036.04d.P528,400.00arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY