Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 14, Problem 2Q
Summary Introduction
To explain: Whether it is totally irrational for a firm to sell a new issue stock and to pay cash dividends during a year.
Introduction:
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
The cost of retained earnings is less than the cost of new outside equity capital.Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cashdividends during the same year. Discuss the meaning of those statements.
The cost of retained earnings is less than the cost of new outside equity capital. Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay dividends during the same year. Discuss the meaning of those statements
Which of the following statements is true?
a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.
Chapter 14 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5QCh. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7QCh. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q
Ch. 14 - Prob. 11QCh. 14 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 14 - Prob. 2PCh. 14 - STOCK REPURCHASES Gamma Industries has net income...Ch. 14 - Prob. 4PCh. 14 - EXTERNAL EQUITY FINANCING Coastal Carolina Heating...Ch. 14 - RESIDUAL DIVIDEND MODEL Walsh Company is...Ch. 14 - DIVIDENDS Brooks Sporting Inc. is prepared to...Ch. 14 - Prob. 8PCh. 14 - ALTERNATIVE DIVIDEND POLICIES In 2018, Keenan...Ch. 14 - Prob. 10SPCh. 14 - Prob. 11ICCh. 14 - Prob. 1TCLCh. 14 - Prob. 2TCLCh. 14 - Prob. 3TCLCh. 14 - Investors are more concerned with future dividends...Ch. 14 - Prob. 5TCL
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?arrow_forwardWhich of the following statements is NOT CORRECT? a. The cost of retained earnings is less than the cost of new common stock due to flotation costs. While retained earnings may appear to be free money on the surface, there is an opportunity cost to them as these funds could be invested elsewhere and earning a return for shareholders. Due to the lower cost of retained earnings, companies generally prefer to use retained earnings to finance their projects, and only issue new common stock when they absolutely must. b. There are two ways to raise common equity. One source is retained earnings that involves bringing in new funds from outside the company, which represents external equity. The second source is new stock issues that involves bringing in new funds from current stockholders of the company, which represents internal equity. c. Flotation costs reduce the amount of capital the firm receives from a new stock issue. The company must make each…arrow_forwardWhat does it mean when a company’s free cash flow is negative in one or more years? Do negative values of free cash flow in any way alter or invalidate the notion that a company’s fair market value equals the present value of its free cash flows discounted at the company’s weighted-average cost of capital? Suppose a company’s free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company’s stock?arrow_forward
- The earnings per share of a company decreased if the additional capital it wanted was obtained by issuing additional shares of stock. Please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital.arrow_forwardWhy is the cost of retained earnings cheaper than the cost of issuing new common stock? Group of answer choices Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price. When a company issues new common stock they also have to pay flotation costs to the underwriter. Either Neitherarrow_forwardIf a firm strictly adheres to the residual dividend policy, a sale of new common stock by the company would suggest that The dividend payout ratio has remained constant. The dividend payout ratio is increasing. No dividends were paid for the year. The dividend payout ratio is decreasing. The dollar amount of investments has decreased.arrow_forward
- Explain why the following statement is wrong: “The stock price is equal to the value of equity, divided by shares outstanding. Therefore, companies should avoid issuing equity because the number of shares outstanding goes up and thus the stock price would decrease."arrow_forwardHow can a company justify not selling treasury shares for more than a year and also not decreasing the company’s capital?arrow_forwardWhat does it mean when a company has zero net income but its stock price has increased? How do you recognize the change under the equity method?arrow_forward
- Preferred 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_forwardTrue or False: The following statement accurately describes how firms make decisions related to issuing new common stock. If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. True: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained earnings is cheaper than capital raised from issuing new common stock. False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $500,000. 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…arrow_forwardWhen additional shares of stock are issued, the earnings per share decreases (assuming no change in total earnings). Please explain how this occurs and what the impact on a firm’s decision to raise capital by equity, as oppose to debt.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning