Fin 516 Quiz 1 Essay

- Merlo, Inc. maintains a debt-equity ratio of 0.25 and follows a residual dividend policy. The company has after-tax earnings of $3,800 for the year and needs $3,200 for new investments. What is the total amount Merlo will pay out in dividends this year?If debt = 0.25 and equity = 1, then debt + equity = 1.25. Equity portion of new investments = $3,200 × (1 / 1.25) = $2,560.00

Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity.

24) A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock, what would its new debt-to-equity ratio be?

Measures how much cash flow you are getting for each dollar invested in an equity

22. A company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating preferred stock and 10,000 shares of $10 par value common stock outstanding. The company paid total cash dividends of $1,000 in its first year of operation. The cash dividend that must be paid to preferred stockholders in the second year before any dividend is paid to common stockholders is: (Points : 1)

Real options valuation analysis was of special importance to her as she believed that the contingent nature of the investment decision and the uncertainty surrounding the ultimate revenue streams made the ‘stealth tier’ ideal for valuation through real options valuation analysis. Martin considered that the best approach was to value the option of each channel of the ‘stealth tier’ per home passed. As a proxy for the present value of each channel Martin used the average current market value per home passed for a typical cable company. For strike price Martin considered the opportunity cost of not lighting up the fiber immediately. Finally, the above inputs along with other assumptions were employed by Martin to estimate an option value of $22.45.

For the first scenario, Sally decide to choose stock options and hold it until maturity date. Despite the taxation and other factors, the future value of cash compensation

courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding,

23) Cash flow and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same.

Dividend Growth Method Common Stock Price (P) Forecasted Dividend (D) 4 = 0.06 Cost of Equity = (D / P) + g = (4 / 42.625) + 0.06 = 15.4% Security Market Line Method Beta (β) Risk free rate (Rf) Treasury Bill Market risk premium (Rm) = = = = 1.2 90 – day 6.4% 15% = = $ 42.625 $ 4.00

Dividend policy refers to the payout policy that a company follows in determining the size and pattern of distributions to shareholders over time. Distribution of cash to shareholders by either payment of dividends and repurchase of shares has been a hotly debated topic amongst scholars. There exists many answers to an optimal dividend policy that satisfies both shareholders and management. With this the company generally faces two operational choices, the investment decision and the financing decision. Investment decisions concern the amount invested in the assets of the business and composition whereas the finance decision involves how the company will finance this. This can be achieved

CHAPTER 2 The Financial Statements BRIEF EXERCISES BE2–1 2008 2008 2008 Beginning Ending Retained 2008 2008 2008 Retained Earnings + Revenues – Expenses – Dividends = Earnings $28.2 + $43.3 – $38.2 – X = $30.6 X = $2.7 2008 Dividends as a percentage of 2008 net income: 2008 Dividends = $ 2.7 = 52.9% 2008 Net income ($43.3-$38.2) $ 5.1 BE2–2 1) Current Liabilities financed $32 billion of the assets.

Currently, debt to equity = total liability/shareholders equity = 16,027/8,447 = 2.22%. But if adding $3,750,000 to equity, the new ratio will be 16,027/ (8,447+ 3,750) = 1.54 which meets bank’s requirement.

4. Which of the following are always positively related to the price of a European call option on a stock?

The current EPS of the company is now $14-$15. Historically, the dividend payout ratio mounts to an average 50%. So, the company expects payout the payout in 1959 to be $7/share. In the previous year the dividend rate was cut from $1.3 to $1.2 per share. But after the new deal, the CEO proposed a hike in the quarterly payout to $1.6 per share from the $1.2 given at present. The CEO even suggested the dividend rate to be propped up to $1.80 in 1960.