Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 17, Problem 22P
Assume capital markets are perfect. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment.
- a. If the board went ahead with this plan, what would happen to the value of Kay stock upon the announcement of a change in policy?
- b. What would happen to the value of Kay stock on the ex-dividend date of the onetime dividend?
- c. Given these price reactions, will this decision benefit investors?
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1) A reasonable way to put a value on a share of stock is to discount the stream of expected
future dividends (annual payments to the shareholder) by the so-called opportunity cost of
money (the interest rate you could get from the bank if you didn't hold on to the stock). If a
share of stock is anticipated to pay a $5 dividend annually for the next five years and then
$8 every year after that in perpetuity, what would the share be worth according to this model
if the cost of money is 4%? Dividends are paid at the end of a year.
Use the information for the question(s) below.
Assume that Rose Corporation's (RC) EBIT is not expected to grow in the future
and that all earnings are paid out as dividends. RC is currently an all-equity firm.
It expects to generate earnings before interest and taxes (EBIT) of $7 million
over the next year. Currently RC has 6 million shares outstanding and its stock
is trading for a price of $12 per share. RC is considering borrowing $12 million
at a rate of 6% and using the proceeds to repurchase shares at the current price
of $12.00.
Following the borrowing of $12 million and subsequent share repurchase, the
equity cost of capital for RC is closest to (%) (2 decimal places):
Chapter 17 Solutions
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 - Prob. 27PCh. 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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