Financial Management: Theory & Practice
16th Edition
ISBN: 9780357296776
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 9, Problem 3MC
1.
Summary Introduction
To determine: The firm’s cost of
2.
Summary Introduction
To discuss: The reasons on whether there is a mistake when Company J has riskier preferred stock than debt.
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Jana’s preferred stock is riskier to investors thanits debt, yet the preferred stock’s yield to investors is lower than the yield to maturity on thedebt. Does this suggest that you have made amistake? (Hint: Think about taxes.)
A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes.
a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?
Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset Selection
Chapter 9 Solutions
Financial Management: Theory & Practice
Ch. 9 - Define each of the following terms: a. Weighted...Ch. 9 - Prob. 2QCh. 9 - Prob. 3QCh. 9 - Distinguish between beta (i.e., market) risk,...Ch. 9 - Suppose a firm estimates its overall cost of...Ch. 9 - Calculate the after-tax cost of debt under each of...Ch. 9 - LL Incorporateds currently outstanding 11% coupon...Ch. 9 - Duggins Veterinary Supplies can issue perpetual...Ch. 9 - Prob. 4PCh. 9 - Summerdahl Resorts common stock is currently...
Ch. 9 - Booher Book Stores has a beta of 0.8. The yield on...Ch. 9 - Prob. 7PCh. 9 - David Ortiz Motors has a target capital structure...Ch. 9 - A companys 6% coupon rate, semiannual payment,...Ch. 9 - The earnings, dividends, and stock price of Shelby...Ch. 9 - Radon Homes’ current EPS is $6.50. It was $4.42 5...Ch. 9 - Spencer Supply’s stock is currently selling for...Ch. 9 - Prob. 13PCh. 9 - Prob. 14PCh. 9 - On January 1, the total market value of the...Ch. 9 - Suppose the Schoof Company has this book value...Ch. 9 - The following table gives the current balance...Ch. 9 - Start with the partial model in the file Ch09 P18...Ch. 9 - During the last few years, Jana Industries has...Ch. 9 - b. What is the market interest rate on Jana’s...Ch. 9 - Prob. 3MCCh. 9 - d. (1) What are the two primary ways companies...Ch. 9 - What is the estimated cost of equity using the...Ch. 9 - f. What is the cost of equity based on the...Ch. 9 - g. What is your final estimate for the cost of...Ch. 9 - h. Janas target capital structure is 30% long-term...Ch. 9 - i. Use Janas target weights to calculate the...Ch. 9 - Prob. 10MCCh. 9 - k. Should the company use its overall WACC as the...Ch. 9 - l. What procedures can be used to estimate the...Ch. 9 - m. Jana is interested in establishing a new...Ch. 9 - n. What are three types of project risk? How can...Ch. 9 - o. Explain in words why new common stock that is...Ch. 9 - p. What four common mistakes in estimating the...
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- What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?arrow_forward2. Which of the following is a characteristic of preferred stock?A. Give voting rights to its owner.B. It is like annuity.C. Investors cannot force the payment of the dividend.D. Dividends are tax-deductible for the firm as opposed to interest payment.arrow_forwardTrue or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost—similar to how the after-tax cost of debt is calculated. False: Flotation costs are additional costs associated with raising new common stock. Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $475,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $550,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). White Lion…arrow_forward
- 1. How do you think today's low interest rate environment is impacting the time value of money? How might this change the value of an asset or liability? 2. What is the relationship between the concepts of net present value and shareholder wealth maximization? 3. Offer some reasons that the intrinsic value that you might calculate with the methodologies learned might yield a price different than what the stock trades at in the stock market. You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.arrow_forwardIf the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.arrow_forwardA firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferentarrow_forward
- which one is correct please confirm? QUESTION 21 Finance researcher Myron Gordon argues that ____. a. the clientele effect has no influence on share value b. the existence of transaction costs has no impact on the dividend decision c. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value d. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to declinearrow_forwardPreferred stock may be good for a company because it a. is not as costly as common stock or bonds. b. expands the capital base of the firm without diluting the common stock ownership. c. has no future negative ramifications when dividend payments are missed. d. does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.arrow_forwardchoose the answer onlyarrow_forward
- 14. Which of the following is NOT the assumptions of Modigliani and Miller without tax theory? A. Investors have different expectations on returns and risks. B. There are no taxes, transaction costs, or issuance costs associated with security trading. C. A firm's financing decisions neither change the cash flows generated by its investments, nor do they reveal new information about them. D. Investors and firms can trade the same set of securities at competitive market prices equal to the present value (PV) of their future cash flows.arrow_forwardChoose the correct. Which of the following is not included in the assumption on which Myron Gorden proposed a model on Stock valuation: A. Retained earning the only source of financing B. Finite Life of the firm C. Taxes do not exist D. Constant rate of return on firms investment.arrow_forwardSince stock represents ownership in the company, equity investing is less risky than debt investing, and as such we can expect lower returns. t/f?arrow_forward
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