Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 17, Problem 24P
Harris Corporation has $250 million in cash, and 100 million shares outstanding. Suppose the corporate tax rate is 35%, and investors pay no
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Hawar International is a shipping firm with a current share price of $4.94 and 9.8 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.7 million and repurchasing
shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent.
a. If the only imperfection is corporate taxes, what will be the share price after this announcement?
b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new
debt?
a. If the only imperfection is corporate taxes, what will be the share price after this announcement?
The share price after this announcement will be $ per share. (Round to the nearest cent.)
b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this…
Braxton Enterprises has made a before-tax profit of $300 million. The firm has no debt and 100 million shares outstanding, with a current market price of $15 per share. Braxton’s board is currently deciding whether to pay out this profit to shareholders through a dividend or a one-time share repurchase.
If the board chooses to pay a dividend, what is the ex-dividend price of the shares in a perfect capital market with no taxes?
If the board instead chooses to use the cash to do a one-time share repurchase, in a perfect capital market with no taxes, what is the price of the shares once the repurchase is complete?
Suppose that the board decides to pay a dividend. Now assume that Braxton Enterprises pays corporate taxes of 30% and the marginal tax rate for shareholders is 40%. What is the after-tax dividend and effective tax rate for shareholders:
Under a classical tax system?
Under an imputation system (assuming that the dividend is 70% franked)?
Hawar International is a shipping firm with a current share price of
$4.50
and
10
million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing
$10
million and repurchasing shares.
a. With perfect capital markets, what will the share price be after this announcement?
b. Suppose that Hawar pays a corporate tax rate of
40%,
and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement?
c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to
$4.55
after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt?
Question content area bottom
Part 1
a. With perfect capital markets, what will the share price be after this announcement?
With perfect capital markets, the share price will be
$enter your response here
per share
Chapter 17 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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
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
- Nikularrow_forwardAssume we are in a Modigliani-Miller (no tax) world. Exeter Corporation has $20 million in excess cash and has no debt. The firm expects to generate additional cash flow of $48 million per year in perpetuity. It has 10 million shares outstanding. Exeter Corporation decides to use the $20 million excess cash to repurchase shares in the stock market. After the share repurchase Exeter plans to distribute all of its annual cash flow as dividends every year. Exeter Corporation’s cost of capital is 12%. Q: What would be the stock price reaction after the announcement of the plan?arrow_forwardAssume we are in a Modigliani-Miller (no tax) world. Exeter Corporation has $20 million in excess cash and has no debt. The firm expects to generate additional cash flow of $48 million per year in perpetuity. It has 10 million shares outstanding. Exeter Corporation decides to use the $20 million excess cash to repurchase shares in the stock market. After the share repurchase Exeter plans to distribute all of its annual cash flow as dividends every year. Exeter Corporation’s cost of capital is 12%. ( a) What would be the stock price reaction after the announcement of the plan? (b) Calculate the share price after the announcement. (c) How many shares can Exeter Corporation buy with its excess cash? (d) Show that the share price after the share repurchase transaction is identical to post-announcement price.arrow_forward
- Natsam Corporation has $150 million of excess cash. The firm has no debt and 600 million shares outstanding with a current market price of $13 per share. Natsam's board has decided to pay out this cash as a one-time dividend. a. What is the ex-dividend price of a share in a perfect capital market? b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market what is the price of the shares once the repurchase is complete? c. In a perfect capital market, which policy, in part (a) or (b), makes investors in the firm better off?arrow_forwardNatsam Corporation has $291 million of excess cash. The firm has no debt and 526 million shares outstanding with a current market price of $16 per share. Natsam's board has decided to pay out this cash as a one-time divide a. What is the ex-dividend price of a share in a perfect capital market? b. If the board instead decided to use the cash do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? c. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off? C a. What is the ex-dividend price of a share in a perfect capital market? The ex-dividend price is $ on a per share basis. (Round to the nearest cent.) b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? The price of the shares once the repurchase is complete is $ per share. (Round to the nearest…arrow_forwardNatsam Corporation has $250 million of excess cash. The firm has no debt and 600 million shares outstanding with a current market price of $17 per share. Natsam's board has decided to pay out this cash as a one-time dividend. What is the ex-dividend price of a share in a perfect capital market? (Round to the nearestcent.) If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market what is the price of the shares once the repurchase is complete? (Round to the nearestcent.) In a perfect capital market, which policy, in part (a) or (b), makes investors in the firm better off? (Round to the nearestcent.)arrow_forward
- Natsam Corporation has $293 million of excess cash. The firm has no debt and 453 million shares outstanding with a current market price of $13 per share. Natsam's board has decided to pay out this cash as a one-time dividend. a. What is the ex-dividend price of a share in a perfect capital market? b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete? c. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off? a. What is the ex-dividend price of a share in a perfect capital market? The ex-dividend price is $12.94 on a per share basis. (Round to the nearest cent.)arrow_forwardQlink ltd is involved in manufacturing of fast -moving consumer goods.The firm is currently an all -equity firm with 30 million shares outstanding and stock price of Kshs.10 per share.The firm plans to announce that it will borrow Ksshs.400 million and use the funds to repurchase shares. The firm will pay interest only on this debt and has no plans to change its debt holding in future. The prevailing corporate tax rate is 30%.(i)What is the market value of the firm's existing existing assets before the announcement?(ii)What is the market value of the firm's assets(including tax shields) just after the debt is issued but before the shares are repurchased?(iii)What is the firm's share price just before the share repurchase?However many shares will Qlink Ltd repurchased?(iv) What are Qlink Ltd's market value balance sheet and share price after share repurchase?arrow_forward1.Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.Suppose that BBB pays corporate taxes of 21% and that shareholders expect the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBB's stock rises to $10.04 per share following the announcement, then the present value of BBB's financial distress costs is closest to: 2. If managed effectively, Rearden Metal will have assets with a market value of $200 million, $300 million, or $400 million next year, with each outcome being equally likely. Managers, however, may decide to engage in wasteful empire building, which will reduce Rearden's market value by $20 million in all cases. Managers may also increase the risk of…arrow_forward
- ) Rendezvous Ltd. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shield will have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equity is 11 percent and your after-tax cost of debt is 7 percent. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equityarrow_forwardPlease help me with this questionarrow_forwardA company with 200 million shares outstanding and no debt plans to issue permanent debt with a face value of $1,500 million in order to repurchase some of its shares. When this plan is announced, the company's share price jumps from $11.41 to $13.86. What is the company's tax rate, if we assume that its savings from debt tax shields are as risky as its debt? (Express your answer as a fraction rounded to four decimal places. For example, if your answer is 34.56%, you should enter 0.3456 as your answer.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
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