PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 3PS
Repurchases Look again at Problem 2. Assume instead that the CFO announces a stock repurchase of $4 per share instead of a cash dividend.
- a. What happens to the stock price when the repurchase is announced? Would you expect the price to increase to $90? Explain briefly.
- b. Suppose the stock is repurchased immediately after the announcement. Would the repurchase result in an additional stock-price increase?
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In the absence of market imperfections and taxes, stock repurchases are sameas cash dividends. How does this change in real world circumstances and whateffect does a stock repurchase announcement have on stock price?
2. Explain why increasing financial leverage increases the risk tolerated by shareholders.
3. In your opinion, why do most businesses with financially attractive investment
opportunities continue to sustain conservative capital structures?
4. On the other hand, why do you suppose several promising small businesses fail to follow
the recommendation in item 3?
5. One determinant of a company's debt capacity is the liquidity of its assets. Name two
common ratios that are exclusively intended to measure the liquidity of a company's
assets relative to its liabilities. Give their specific use to the company's performance
analyzation.
Which of the following statements is FALSE?
Select one:
O In recent years, an increasing number of firms have replaced dividend payouts with share repurchases.
O The price of a share of stock is equal to the present value of the expected future dividends it will pay.
O The law of one price implies that to value any security, we must determine the expected cash flows an investor will receive
from owning it.
O The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders,
O An investor might generate cash by choosing to sell the shares at some future date.
O Fulture dividend payments and stock prices are not known with certainty: rather these values are based on the investor's
expectations at the time the stock is purchased.
O The dividend yield is the expected annual dividend of a stock, divided by its expected future sale price.
O In the dividend discount model, we implicitly assume that any cash paid out to the shareholders takes the…
Chapter 16 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 16 - Dividend payments In 2017, Entergy paid a regular...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 2. Assume...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Company dividend policy Here are several facts...Ch. 16 - Prob. 7PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Information content of dividends Generous dividend...Ch. 16 - Prob. 11PS
Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Respond...Ch. 16 - Prob. 15PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Payout and valuation Look back one last time at...Ch. 16 - Dividend clienteles Mr. Milquetoast admires Warren...Ch. 16 - Prob. 24PSCh. 16 - Payout and taxes Which of the following U.S....Ch. 16 - Prob. 26PSCh. 16 - Prob. 27PSCh. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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- In some cases, stock price decreases on the announcement of equity repurchases. How would you explain this?arrow_forwardEvaluate the following statement: When a firm pays dividend, its stock price decreases in the market. Therefore, it is always better to buy a stock on the date of dividend payment.arrow_forward"The dividend discount model is used to find the price of a stock based on the expected dividends received by the shareholder and the discount rate. Therefore, all else constant, the price of a share of stock will increase if the discount rate decreases." A) True B) Falsearrow_forward
- Which of the following is the best reason why the price-earnings method is often used by investors to estimate the fair price of a stock? a) Because the earning multiples are easily found in online financial databases. b) Earnings per share is a known amount that is related to the payment of future dividends. c) Because the price-earnings method gives the same answer as the constant growth method and is easier to compute. d) The price-earnings method has been shown to provide the most accurate price estimate.arrow_forwardWhat is the difference between a dividend and a stock repurchase? Why have stock repurchases becoming increasingly popular over the last several years?arrow_forwardSuppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for several years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct? Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: PO = D1/(r - g). Under these conditions, we can estimate a value for the stock, but we cannot use any form of the constant growth DCF model to do so. Such a stock should have a value of zero until it actually begins paying dividends. The value of the stock can be found using DCF procedures by finding the present value of expected future dividends accounting for their timing and amount.arrow_forward
- 10. Recapitalization Aa Aa Firms use recapitalization for different reasons. Recapitalization is the process through which firms make desired changes in their capital structure by using debt to repurchase equity. Firms may decide to recapitalize for various reasons, such as to maintain an optimal capital structure, to use as a defense mechanism against a hostile takeover, to minimize taxes, or to use in an exit strategy for venture capitalists. As an analyst, you are tracking the financial performance of Gadgetime Inc. The company has been 100% equity owned but recently made changes to its capital structure. You have collected the following information about the recapitalization: • Gadgetime issued $17,500,000 in new debt to buy back stock. • The firm had no short-term investments before or after the recapitalization. • Gadgetime had 1,750,000 shares outstanding before the recapitalization. • Gadgetime's capital structure now has 25% debt. The company's operations are valued at $70…arrow_forwardTrue or False, pls explain why 1) A stock buyback transaction will increase the number of treasury shares True Falsearrow_forwardWhen a stock repurchase occurs, which of the following is not correct?a. EPS decreasesb. Shares are repurchased then cancelledc. Investors may regard this as a tax break compared to a dividend paymentd. Costs in servicing small shareholders may be reducede. All of the above are correctarrow_forward
- What can you expect to be different on the announcement date AND after the ex-dividend date when a stock price of a certain company drops after it declares dividends?arrow_forwardWhen a company goes public, it declares what its dividend will be so investors know what their annual income will be. Question 16 options: True Falsearrow_forwardIf a company is thinking about distributing excesscash through a stock repurchase program in lieuof continuing to pay regular cash dividends, whatare some factors it should consider before makingthe change?arrow_forward
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Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License