Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 18P
Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of
a. Compute earnings per share for both firms. Assume a 25 percent tax rate.
b. In part a, you should have gotten the same answer for both companies’ earnings per share. Assuming a P/E ratio of 22 for each company, what would its stock price be?
c. Now as part of your analysis, assume the P/E ratio would be 16 for the riskier company in terms of heavy debt utilization in the capital structure and 24 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.)
d. Based on the evidence in part c, should management be concerned only about the impact of financing plans on earnings per share, or should stockholders’ wealth maximization (stock price) be considered as well?
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Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights:
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bond paying annual interest at a
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coupon rate. A flotation cost of
2%
of the par value is required.
Preferred stock
8.50%
(annual dividend) preferred stock having a par value of
$100
can be sold for
$96.
An additional fee of
$4
per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for
$60
per share. The stock has paid a dividend that has gradually increased for many years, rising from
$2.70
ten years ago to the
$5.07
dividend payment,…
Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The
weighted average cost is to be measured by using the following weights: 30% long-term debt, 15% preferred stock, and 55% common stock equity (retained earnings, new common stock, or both).
The firm's tax rate is 22%.
Debt The firm can sell for $1025 a 18-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 4% of the par value is required.
Preferred stock 10.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92. An additional fee of $2 per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for $59.43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the
$3.26 dividend payment, Do, that the company just recently…
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights:
30% long-term debt,
10% preferred stock, and
60% common stock equity (retained earnings, new common stock, or both).
The firm's tax rate is 23%.
Debt : The firm can sell for $1030 a 14-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 2% of the par value is required.
Preferred stock: 9.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92.An additional fee of $2 per share must be paid to the underwriters.
Common stock: The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the $3.26 dividend payment, D0, that the company just recently made.…
Chapter 5 Solutions
Foundations of Financial Management
Ch. 5 - Discuss the various uses for break-even analysis....Ch. 5 - What factors would cause a difference in the use...Ch. 5 - Explain how the break-even point and operating...Ch. 5 - Prob. 4DQCh. 5 - What does risk taking have to do with the use of...Ch. 5 - Discuss the limitations of financial leverage....Ch. 5 - Prob. 7DQCh. 5 - Explain how combined leverage brings together...Ch. 5 - Explain why operating leverage decreases as a...Ch. 5 - Prob. 10DQ
Ch. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Draw two break-even graphs-one for a conservative...Ch. 5 - Prob. 5PCh. 5 - Shawn Pen & Pencil Sets Inc. has fixed costs of ....Ch. 5 - Calloway Cab Company determines its break-even...Ch. 5 - Prob. 8PCh. 5 - Boise Timber Co. computes its break-even point...Ch. 5 - The Sterling Tire Company’s income statement for...Ch. 5 - Prob. 11PCh. 5 - Healthy Foods Inc. sells 50-pound bags of grapes...Ch. 5 - United Snack Company sells 50-pound bags of...Ch. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Lenow’s Drug Stores and Hall’s Pharmaceuticals...Ch. 5 - The capital structure for Cain Supplies is...Ch. 5 - Sterling Optical and Royal Optical both make glass...Ch. 5 - Prob. 19PCh. 5 - Sinclair Manufacturing and Boswell Brothers Inc....Ch. 5 - DeSoto Tools Inc. is planning to expand...Ch. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Mr. Gold is in the widget business. He currently...Ch. 5 - Delsing Canning Company is considering an...Ch. 5 - Prob. 2WECh. 5 - Prob. 3WECh. 5 - Prob. 4WECh. 5 - Prob. 5WE
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