Help#2

Sheet1

:

arget payout ratio

, y/e 2015

Other things equal, what will be House of Herring’s stock price after the planned dividend payout?

Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase?
c. Suppose the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.

alculation

a. Stock price C
b. Stock price

C

c.

C

C

Problem 12-6

Here are key financial data for House of Herring, In Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper

c.

Earnings per share for 2015

$5.50

Number of shares outstanding

40 million

T

50%

Planned dividend per share

$2.75

Stock price

$130

House of Herring plans to pay the entire dividend early in January 2016. All corporate and personal taxes were repealed in 2014.

a.

b.

Answers:

C

F

Shares repurchased

Ex-dividend price

Shares needed

Sheet2

F

a.

F

b.

F

T C

T C

C

Problem 14-2
Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate. a. How much of the firm’s value is accounted for by the debt-generated tax shield? b. How much better off will UF’s a shareholder be if the firm borrows $20 more and uses it to repurchase stock?
Answer:
Step 1:
Tax rate – Tc
Permanent Debt – D
Additional Debt – D
Step 2:
	Formula (in words)		Calculation
a. Tax shield
b. Tax shield
Benefit to Shareholders	TIP: difference between a and b

Sheet3

Answers:

Formula (in words) Calculation
a.

C

b.

T C

Problem 15-6
A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project’s APV in the following cases? a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds. b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.
APV stock issue		T	TIP: p.394
APV debt increases	TIP: p.393

Sheet4