EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
17th Edition
ISBN: 9781260464900
Author: BLOCK
Publisher: MCGRAW-HILL LEARNING SOLN.(CC)
Question
Book Icon
Chapter 18, Problem 21P

a.

Summary Introduction

To calculate: The current stock price of Carlton Corporation.

Introduction:

Stock price:

A stock price refers to the current price of a share of a company at which the stock is trading on. This price is determined on the basis of the supply and demand factors in the stock market.

a.

Expert Solution
Check Mark

Answer to Problem 21P

The current stock price is $50.

Explanation of Solution

The current stock price is computed as follows:

Price per Share=P/E Ratio×Total EarningsTotal Outstanding Shares =20×$5 million2 million                              =20×$2.50=$50

b.

Summary Introduction

To calculate: The dividend per share if $4 million is used to pay the dividends.

Introduction:

Dividend:

The dividend is the sum of money which is paid regularly to the shareholders as a return on their investments in the company.

b.

Expert Solution
Check Mark

Answer to Problem 21P

If $4 million is used to pay the dividends, then the dividend per share is $2.

Explanation of Solution

The dividend per share can be calculated as follows, if $4 million is used to pay the dividend by the company:

Dividend per Share=Dividend Paid Number of Outstanding Shares =$4 million   2 million =$2 per share

c.

Summary Introduction

To calculate: The number of shares acquired if $4 million is used to repurchase shares in the market at a price of $54 per share.

Introduction:

Stock price:

A stock price refers to the current price of a share of a company at which the stock is trading on. This price is determined on the basis of the supply and demand factors in the stock market.

c.

Expert Solution
Check Mark

Answer to Problem 21P

If $4 million is used to repurchase shares in the market at a price of $54 per share, then the number of shares acquired is 74,074.

Explanation of Solution

The number of acquired shares can be calculated, if an excess amount of $4 million is used for repurchasing shares at $54 per share.

Number of Acquired Shares for Repurchasing=Excess Amount Available Repurchase share price=$4,000,000$54=74,047 shares

d.

Summary Introduction

To calculate: New earnings per share.

Introduction:

Earnings per share (EPS):

It is the profit per outstanding share of a public company. A higher EPS indicates higher value of the company because investors are ready to pay higher price for one share of the company. 

d.

Expert Solution
Check Mark

Answer to Problem 21P

New EPS is $2.60.

Explanation of Solution

The new EPS can be calculated as follows:

EPS=Total EarningsShare OutstandingNumber of Acquired Shares after Repurchasing=$5,000,0002,000,00074,047 = $5,000,0001,925,926 = $2.60.

e.

Summary Introduction

To calculate: The price of security, if P/E ratio remains constant and the stock price increases.

Introduction:

P/E ratio:

This is the ratio of a corporation’s share price to its EPS. This ratio is used to determine if the company is undervalued or overvalued.

e.

Expert Solution
Check Mark

Answer to Problem 21P

The price of share is $52 and increase in the stock is $2.

Explanation of Solution

The calculation of the price of the shares is as follows:

Price of Share=P/ E ratio×EPS=20×$2.60=$52

The increase in the stock can be computed as follows:

Increase in Stock=New Price of StockOld Price of Stock= $52$50=$2.

f.

Summary Introduction

To calculate: The change in the wealth of the shareholders as a result of change in the stock price, as opposed to receiving the cash dividend.

Introduction:

Stock price:

A stock price refers to the current price of a share of a company at which the stock is trading on. This price is determined on the basis of the supply and demand factors in the stock market.

f.

Expert Solution
Check Mark

Answer to Problem 21P

The wealth of the shareholder has changed due to the increased total value per share by $52.

Explanation of Solution

The calculation of the total value per share is as follows:

Total Value per Share=Market Value per Share+Cash Dividend per Share=$50+$2=$52

By repurchasing the stock, the total value per share is increased to $52, so the wealth of the shareholders has increased.

g.

Summary Introduction

To explain: The reasons of repurchase of shares by a corporation.

Introduction:

Repurchase of shares:

The repurchase of share is a transactional process in which a company repurchases its shares from the marketplace, due to the management’s consideration of being its shares being undervalued.

g.

Expert Solution
Check Mark

Answer to Problem 21P

The reason for the repurchase of shares is considered by the company as being undervalued or underpriced. And, also the repurchase of share can be for the stock option plan for the employees of the company. 

Explanation of Solution

The reason for repurchase is that the appreciation in value associated with a stock repurchase defers the capital gains tax until the stock is sold, whereas dividends are taxed when received.

Another reason for the repurchase of shares is that the company considers its shares to be undervalued or underpriced, so repurchase will bring down the supply of shares and will increase the price of the share.

The company also repurchases its share to be used under the employee stock option plan and as a protective device.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Don't solve this question with unclear data. i will give unhelpful rating . please skip this qn
The prodave paint company earned a net profit margin of 20% on revenues of $20m this year. Fixed Capital Investment was $2 m and depreciation was $3 m. Working capital Investment equals 7.5% of the Sales level in that year. Net income, fixed Capital Investment, depreciation, interest expenses and sales are expected to grow at 10% per year for the next 5 years. After 5 years, the growth in sales , net income, depreciation and interest expenses will decline to a stable 5% per year and fixed Capital Investment and depreciation will offset each other. The tax rate is 40% and the prodave has 1 m shares of common stock outstanding and long term debt paying 12.5% interest trading at it's par value of $32 m. The WACC is 17% during the high growth stage and 15% during the stable growth stage.  Required: a) Calculate FCFE b) Determine FCFF c) Estimate the value of Equity  d) Calculate the value of the Firm
A key dynamic within any Multi-National Corporation (MNC) is cash and foreign exchange risk exposure. Cash management is critical and also heavily influenced by global dynamics, especially since COVID-19. Within the Caribbean and North American jurisdiction, the economic framework is tightly connected with the major Asian economies of China, the United Kingdom and Japan. The Caribbean and the North American economy have been a barometer of the global economic cycle.) For both Caribbean and North American economies, many Multi-National Corporations have made significant investments to reduce the production cost of goods and diversification benefits. Despite the benefits that could materialize, some North American countries have not been resilient through Global market shocks. Given this context, the following questions require research within the Caribbean context and current market dynamics since COVID-19. Your Manager has asked you to address the following concerns in the report 1)…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Text book image
Corporate Fin Focused Approach
Finance
ISBN:9781285660516
Author:EHRHARDT
Publisher:Cengage