F has 300,000 shares outstanding with a market value of $25 each and no debt. The of F’s equity is 0.9, the risk-free rate is 4% and the expected return of the market portfolio is 9%. F considers the following alternative operations: Operation 1: F pays $1,000,000 in dividends to stockholders. This dividend is financed by issuing debt for the same amount. If you hold one F stock, how much value is created/destroyed for you in this operation? Operation 2: F invests $1,500,000 in a project that generates $200,000 per year after tax (perpetuity). This project has the same systematic risk as F’s existing assets. The investment cost is financed by issuing debt for the same amount ($1,500,000). If you hold one F stock, how much value is created/destroyed for you in this operation?
F has 300,000 shares outstanding with a market value of $25 each and no debt. The of F’s equity is 0.9, the risk-free rate is 4% and the expected return of the market portfolio is 9%. F considers the following alternative operations:
Operation 1: F pays $1,000,000 in dividends to stockholders. This dividend is financed by issuing debt for the same amount. If you hold one F stock, how much value is created/destroyed for you in this operation?
Operation 2: F invests $1,500,000 in a project that generates $200,000 per year after tax (perpetuity). This project has the same systematic risk as F’s existing assets. The investment cost is financed by issuing debt for the same amount ($1,500,000). If you hold one F stock, how much value is created/destroyed for you in this operation?
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