Fundamentals of Corporate Finance with Connect Access Card
11th Edition
ISBN: 9781259418952
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 17.4, Problem 17.4ACQ
Why might some individual investors favor a high dividend payout?
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Nick Weber wants to have $120,000 at the end of 10 years, and his only investment outlet is an 8 percent long-term certicate of deposit (compounded annually). With the certificate of deposit, he made an initial investment at the beginning of the year year. How much does Nick need to deposit to get the $120,000 at the end of 10 years.
a. What amount could Nick pay at the end of each year annually for 10 years to achieve this same objective?
High Hand Nursery has total assests of $900,000, current liabilities of $202,000, and long-term liabilities of $104,000. There is $90,000 in preferred stock outstanding. Twenty thousand shares of common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $40,000 in earnings available to common stockholders for dividends, and the firm's stock has a P/E of 22 times earnings per share, what is the current price of the stock?
c. What is the ratio of market value per share to book value per share?
Need the WACC %
WACC and Optimal Capital Structure
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows:
Market Debt-to-Value Ratio (wd)
Market Equity-to-Value Ratio (ws)
Market Debt-toEquity Ratio (D/S)
Before-Tax Cost ofDebt (rd)
0.0
1.0
0.00
6.0
%
0.10
0.90
0.1111
6.4
0.20
0.80
0.2500
7.0
0.30
0.70
0.4286
8.2
0.40
0.60
0.6667
10.0
F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.4. Based on this information, what…
Chapter 17 Solutions
Fundamentals of Corporate Finance with Connect Access Card
Ch. 17.1 - Prob. 17.1ACQCh. 17.1 - What are the mechanics of the cash dividend...Ch. 17.1 - How should the price of a stock change when it...Ch. 17.2 - How can an investor create a homemade dividend?Ch. 17.2 - Prob. 17.2BCQCh. 17.3 - Prob. 17.3ACQCh. 17.3 - Why do flotation costs favor a low payout?Ch. 17.4 - Why might some individual investors favor a high...Ch. 17.4 - Prob. 17.4BCQCh. 17.5 - How does the market react to unexpected dividend...
Ch. 17.5 - Prob. 17.5BCQCh. 17.6 - Prob. 17.6ACQCh. 17.6 - Prob. 17.6BCQCh. 17.8 - Prob. 17.8ACQCh. 17.8 - How does the accounting treatment of a stock split...Ch. 17 - Dividends are paid to the parties listed as...Ch. 17 - Prob. 17.3CTFCh. 17 - Prob. 17.4CTFCh. 17 - Prob. 17.8CTFCh. 17 - Dividend Policy Irrelevance [LO2] How is it...Ch. 17 - Prob. 2CRCTCh. 17 - Prob. 3CRCTCh. 17 - Prob. 4CRCTCh. 17 - Prob. 5CRCTCh. 17 - Prob. 6CRCTCh. 17 - Prob. 7CRCTCh. 17 - Prob. 8CRCTCh. 17 - Prob. 9CRCTCh. 17 - Prob. 10CRCTCh. 17 - Prob. 1QPCh. 17 - Prob. 2QPCh. 17 - Prob. 3QPCh. 17 - Prob. 4QPCh. 17 - Regular Dividends [LO1] The balance sheet for...Ch. 17 - Prob. 6QPCh. 17 - Prob. 7QPCh. 17 - Stock Dividends [LO3] The company with the common...Ch. 17 - Stock Splits [LO3] In the previous problem,...Ch. 17 - Homemade Dividends [LO2] You own 1,000 shares of...Ch. 17 - Prob. 11QPCh. 17 - Stock Repurchase [LO4] Galles Corporation is...Ch. 17 - Expected Return, Dividends, and Taxes [LO2] The...Ch. 17 - Dividends and Taxes [LO2] As discussed in the...Ch. 17 - Prob. 15QPCh. 17 - Dividends versus Reinvestment [LO2] After...Ch. 17 - Prob. 1MCh. 17 - Prob. 2MCh. 17 - Prob. 3MCh. 17 - Prob. 4MCh. 17 - Prob. 5MCh. 17 - Prob. 6M
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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
- Ned's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125, respectively, while purchases amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days. What are the cash disbursements for the first quarter? Question 4 options: $92 $88 $76 $100 $110arrow_forwardLiberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forward
- Which of the following is the best definition of cash budget? Question 10 options: Costs that rise with increases in the level of investment in current assets. A forecast of cash receipts and disbursements for the next planning period. A secured short-term loan that involves either the assignment or factoring of the receivable. The time between sale of inventory and collection of the receivable. The time between receipt of inventory and payment for it.arrow_forwardShort-term financial decisions are typically defined to include cash inflows and outflows that occur within __ year(s) or less. Question 9 options: Four Two Three Five Onearrow_forwardA national firm has sales of $575,000 and cost of goods sold of $368,000. At the beginning of the year, the inventory was $42,000. At the end of the year, the inventory balance was $45,000. What is the inventory turnover rate? Question 8 options: 8.46 times 13.22 times 43.14 times 12.78 times 28.56 timesarrow_forward
- The formula (Cash cycle + accounts payable period) correctly defines the operating cycle. Question 7 options: False Truearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forwardWhich of the following issues is/are NOT considered a part of short-term finance? Question 5 options: The amount of credit that should be extended to customers The firm determining whether to issue commercial paper or obtain a bank loan The amount of the firms current income that should be paid out as dividends The amount the firm should borrow short-term A reasonable level of cash for the firm to maintainarrow_forward
- Liberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn increase in fixed assets is a source of cash. Question 2 options: True Falsearrow_forwardIf the initial current ratio for a firm is greater than one, then using cash to purchase marketable securities will decrease net working capital. True or falsearrow_forward
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