
Dividend policy and the
The current price of the shares of Charles River Mining Corporation is $50. Next year’s earnings and dividends per share are $4 and $2, respectively. Investors expect perpetual growth at 8% per year. The expected
We can use the perpetual-growth model to calculate stock price:
Suppose that Charles River Mining announces that it will switch to a 100% payout policy, issuing shares as necessary to finance growth. Use the perpetual-growth model to show that current stock price is unchanged.

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Chapter 16 Solutions
EBK PRINCIPLES OF CORPORATE FINANCE
- An investor is buying a bond that pays semi-annual interest. The par value is $900 and the coupon rate is 6%. The investor plans to hold the bond to its maturity, which is 5 years from now. If her typical required rate of return is 7%, what is the most the investor should pay for the bond? Use a Time Value of Money function for full credit. (round to nearest cent)arrow_forwardIRR: Mutually exclusive projects Nile Inc. wants to choose the better of two mutually exclusive projects that expand warehouse capacity. The projects' cash flows are shown in the following table: The cost of capital is 18%. a. Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs. b. Which project is preferred? a. The internal rate of return (IRR) of project X is %. (Round to two decimal places.) Is project X acceptable on the basis of IRR? (Select the best answer below.) Yes No The internal rate of return (IRR) of project Y is %. (Round to two decimal places.) Is project Y acceptable on the basis of IRR? (Select the best answer below.) ○ Yes Ο No b. Which project is preferred? (Select the best answer below.) A. Project X B. Project Y C. Neitherarrow_forwardA preferred stock has a par value of $105 and pays an annual dividend of 3% of par. If similar investments have an annual rate of return of 5%, what is the current value of this preferred stock. (round to nearest cent)arrow_forward
- Common stock value-Variable growth Lawrence Industries' most recent annual dividend was $1.82 per share (Do = $1.82), and the firm's required return is 15%. Find the market value of Lawrence's shares when dividends are expected to grow at 30% annually for 3 years, followed by a 6% constant annual growth rate in years 4 to infinity. The market value of Lawrence's shares is $ (Round to the nearest cent.)arrow_forwardDepreciation A firm is evaluating the acquisition of an asset that costs $68,400 and requires $3,990 in installation costs. If the firm depreciates the asset under MACRS, using a five-year recovery period (see table |), determine the depreciation charge for each year. The annual depreciation expense for year 1 will be $ The annual depreciation expense for year 2 will be $ The annual depreciation expense for year 3 will be $ The annual depreciation expense for year 4 will be $ The annual depreciation expense for year 5 will be $ The annual depreciation expense for year 6 will be $ (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.)arrow_forwardIntegrative Risk and valuation Giant Enterprises' stock has a required return of 15.9%. The company, which plans to pay a dividend of $2.22 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2016-2022 period, when the following dividends were paid: a. If the risk-free rate is 6%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. (Hint: Round the computed dividend growth rate to the nearest whole percent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. a. If the risk-free rate is 6%, the risk premium on Giant's stock is %. (Round to one decimal place.) (Round to the nearest cent.) b. Using the constant-growth model, the value of Giant's stock is $ c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. (Select from the drop-down…arrow_forward
- Bond valuation-Semiannual interest Find the value of a bond maturing in 4 years, with a $1,000 par value and a coupon interest rate of 9% (4.5% paid semiannually) if the required return on similar-risk bonds is 13% annual interest. The present value of the bond is $ (Round to the nearest cent.)arrow_forwardYield to maturity The relationship between a bond's yield to maturity and coupon interest rate can be used to predict its pricing level. For the bond listed below, state whether the price of the bond will be at a premium to par, at par, or at a discount to par. Coupon interest rate 6% Yield to maturity 11% What is the price of the bond in relation to its par value? (Select the best answer below.) ○ A. The bond sells at a discount to par. B. The bond sells at a premium to par. OC. The bond sells at par.arrow_forwardBook value Find the book value for the asset shown in the accompanying table, assuming that MACRS depreciation is being used Elapsed time Recovery Asset A Installed cost $903,000 period (years) 5 since purchase (years) 4 The remaining book value is $ (Round to the nearest dollar.)arrow_forward
- Common stock value: Constant growth The common stock of Barr Labs Inc., trades for $111 per share. Investors expect the company to pay a(n) $1.43 dividend next year, and they expect that dividend to grow at a constant rate forever. If investors require a(n) 15.5% return on this stock, what is the dividend growth rate that they are anticipating? The anticipated dividend growth rate is %. (Round to two decimal places.)arrow_forwardChoosing between two projects with acceptable payback periods Shell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The cash inflows associated with each project are shown in the following table: a. Determine the payback period of each project. b. Which project is acceptable based on payback period? a. The payback period of project A is years. (Round to two decimal places.) The payback period of project B is years. (Round to two decimal places.) b. Which project is acceptable based on payback period? (Select the best answer below.) ○ Project A would be preferred over project B because the larger cash flows are in the later years of the project. ○ Project B would be preferred over project A because the larger cash flows are in the early years of the project.arrow_forwardWeekend Warriors, Inc., has 35% debt and 65% equity in its capital structure. The firm's estimated after-tax cost of debt is 5% and its estimated cost of equity is 13%. Determine the firm's weighted average cost of capital (WACC). Weekend Warriors' weighted average cost of capital (WACC) is %. (Round to two decimal places.)arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT


