EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 14, Problem 7QP
a.
Summary Introduction
To compute: The changes in the accounts of company F.
b.
Summary Introduction
To compute: The changes in company in case of repurchase of 2 million shares.
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Suppose that investors cumulatively short-sell 6 million shares of a stock and the share price appreciates from $200 to $1100. In
the meantime, the stock pays a dividend of $20 per share. What is the total amount of loss that the short sellers suffer from their
position? You can ignore shorting fees and assume all interest rates are zero).
A. $5.5 billion
B. $7.3 billion
C. $6.1 billion
O D. $4.3 billion
7. Answer both questions: a) The stock of Payout Inc. will go ex-dividend tomorrow. The dividend will be $1 per share. There are 20,000 shares of stock outstanding. The market value balance sheet for Payout is below:
Assets
Liabilities and equity
Cash
$100,000
Equity
$1,000,000
Fixed assets
$900,000
i) What price is Payout selling for today? Explain your answer.
ii) What price will it sell for tomorrow? Explain your answer.
b) Now suppose that Payout announces its intention to repurchase $20,000 worth of stock instead of paying out the dividend.
i) What effect will the repurchase have on an investor who currently holds 10 shares and sells 2 of those shares back to the company in the repurchase?
ii) Compare the effects of the repurchase to the effects of the cash dividend that worked out in 7(a).
.Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
a.If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.13.
Chapter 14 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
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