EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 17, Problem 21P
Clovix Corporation has $50 million in cash, 10 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $50 million to pay an immediate special dividend of $5 per share, or to retain and invest it at the risk-free rate of 10% and use the $5 million in interest earned to increase its regular annual dividend of $0.50 per share. Assume perfect capital markets.
- a. Suppose Clovix pays the special dividend. How can a shareholder who would prefer an increase in the regular dividend create it on her own?
- b. Suppose Clovix increases its regular dividend. How can a shareholder who would prefer the special dividend create it on her own?
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am. 132.
Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably
justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent.
The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and
selling price are as follows.
($ millions)
Year
5
1
$38
Free cash flows
2 3 4
$53 $58 $63 $ 63
$ 756
Selling price
Total free cash flows
$38 $53 $58 $63 $819
To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal
payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after
the acquisition.
Selected Additional Information
Tax rate
40 percent
Risk-free interest rate
3 percent
Market risk premium
5 percent
a. Estimate the target firm's…
Chapter 17 Solutions
EBK CORPORATE FINANCE
Ch. 17.1 - Prob. 1CCCh. 17.1 - Prob. 2CCCh. 17.2 - Prob. 1CCCh. 17.2 - In a perfect capital market, how important is the...Ch. 17.3 - Prob. 1CCCh. 17.3 - Prob. 2CCCh. 17.4 - Prob. 1CCCh. 17.4 - Prob. 2CCCh. 17.5 - Is there an advantage for a firm to retain its...Ch. 17.5 - Prob. 2CC
Ch. 17.6 - Prob. 1CCCh. 17.6 - Prob. 2CCCh. 17.7 - Prob. 1CCCh. 17.7 - Prob. 2CCCh. 17 - Prob. 1PCh. 17 - ABC Corporation announced that it will pay a...Ch. 17 - Prob. 3PCh. 17 - RFC Corp. has announced a 1 dividend. If RFCs...Ch. 17 - Prob. 5PCh. 17 - KMS Corporation has assets with a market value of...Ch. 17 - Natsam Corporation has 250 million of excess cash....Ch. 17 - Suppose the board of Natsam Corporation decided to...Ch. 17 - Prob. 9PCh. 17 - Suppose BE Press paid dividends at the end of each...Ch. 17 - The HNH Corporation will pay a constant dividend...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Suppose that all capital gains are taxed at a 25%...Ch. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - A stock that you know is held by long-term...Ch. 17 - Clovix Corporation has 50 million in cash, 10...Ch. 17 - Assume capital markets are perfect. Kay Industries...Ch. 17 - Redo Problem 22., but assume that Kay must pay a...Ch. 17 - Harris Corporation has 250 million in cash, and...Ch. 17 - Redo Problem 22, but assume the following: a....Ch. 17 - Prob. 26PCh. 17 - Use the data in Table 15.3 to calculate the tax...Ch. 17 - Explain under which conditions an increase in the...Ch. 17 - Why is an announcement of a share repurchase...Ch. 17 - AMC Corporation currently has an enterprise value...Ch. 17 - Prob. 31PCh. 17 - Prob. 32PCh. 17 - Explain why most companies choose to pay stock...Ch. 17 - Prob. 34PCh. 17 - Prob. 35P
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