Concept explainers
a.1.
To explain: Dividend policy.
Introduction:
Stock Dividend:
When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend
2.
To explain: Dividend irrelevance theory and assumptions underlying the theory.
3.
To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends
b.(1)
To discuss: The information content or signaling, hypothesis.
(2)
To discuss: Clientele effect.
(3)
To explain: Catering theory.
(4)
To explain: The effect of catering theory on dividend policy.
c.1.
To calculate: Amount to be raised through equity.
2.
To calculate: Payout ratio and the effect on it under the residual dividend model.
3.
To explain: advantages and disadvantages of residual policy.
d.
To determine: The series of steps that many company’s take in setting dividend policy in practice.
e.
To explain: dividend reinvestment plan and its working.
f.
To explain: Stock dividends, stock splits and their advantages as well as disadvantages.
g.
To explain: Stock repurchase and its advantages and disadvantages.
Trending nowThis is a popular solution!
Chapter 15 Solutions
Fundamentals of Financial Management (MindTap Course List)
- Limited Corporation is looking to replace a machine that is expected to increase productivity and, thereby, revenue. The cost of the machine is $100,000. Revenue is expected to increase by $20,000 in the first year, $50,000 in the second year, and $80,000 in the third year. After the third year, the company plans substitute the machine with a higher performance one. The alternative to this investment is to buy $100,000 in risky corporate bonds that currently yield 10% annually. Explain the feasibility of this project by computing the NPV.arrow_forwardHunger Industries operated as a monopolist for the past several years, earning annual profits amounting to $40 million, which it could have maintained if Munch Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Hunger Industries now earns $20 million annually. The managers of Hunger Industries are trying to devise a plan to drive Munch Incorporated out of the market so Hunger can regain its monopoly position (and profit). One of Hunger's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $100 million, Ignoring antitrust concerns, if Hunger Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits is Multiple Choice *** MAVE $900 million -$100 million. $1,900 milion $2,040 milionarrow_forward1. CASE STUDY Giangelo Corporation would like to venture in manufacturing a specialized tool that is required by a semi- conductor company. In order to accomplish this, it is considering two options that both require raising large amount of funds. First option (Project X) is the construction of a factory building and acquisition of machineries for an estimated cost of P30 million. The other alternative (Project Y) is the acquisition of an existing company that manufactures the same tool at a price of P50 million. In order to fund the project, the Company will have to apply for a loan from a bank and issue shares of stocks. The management contemplated a more leveraged approach by availing the 70% of the financial requirements through loan borrowing and the rest from the issuance of shares. The interest on bank loan is at 11% per annum while the issuance of shares will require return to stockholders at 8% per annum. The applicable income tax rate is 25%. Both of the projects will have…arrow_forward
- Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,600 units x $31.00) Variable cost (8,600 units x a) Contribution margin Fixed cost Net income Company Name Larson $ 20.00 $ 266,600 (172,000) $ 94,600 (25,000) $ 69,600 Benson $ 10.00 $ 266,600 (86,000) $ 180,600 (111,000) $ 69,600 Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number…arrow_forwardCEO, Worthington Industries (WOR) (a high-technology steel company) slogan : “We try to find the best technology, stay ahead of the competition, and serve the customer...We’ll make any investment that will pay back quickly...but if it is something that we really see as a must down the road, payback is not going to be that important.” In a post of approximately 150 words, explain the role of capital investment analysis for this companyarrow_forwardHooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows: Recession Normal economy Strong economy Outcomes ($ millions) Expected value Standard deviation Coefficient of variation $20 40 60 Probability 0.4 0.2 0.4 Compute the expected value, standard deviation, and coefficient of variation prior to the acquisition. (Do not round intermediate calculations. Enter your dollar answers in millions rounded to 2 decimal places (e.g., $12,300,000 should be entered as "12.30"). Round the coefficient of variation to 3 decimal places.) million millionarrow_forward
- Arnold Vimka is a venture capitalist facing two alternative Investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,100 units × $28.00) Variable cost (8,100 units x a) Contribution margin. Fixed cost Net income Required A Variable cost per unit Sales revenue Variable cost Contribution margin Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year Increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units Increases, both revenue and variable cost will…arrow_forwardMini Case Your employer, a midsized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer the following questions: Describe briefly the legal rights and privileges of common stockholders. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model? Use…arrow_forward1) Brandon Production is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable. Current financials for the firm are shown in the table below. In the first option, marketing will increase sales (and costs) by 50%. The next option is Vendor (Supplier) changes, which would result in a decrease of 12% in the cost of inputs. Finally, there is an OM option, which would reduce production costs by 25%. Which of the options would you recommend to the firm if it can only pursue one option? In addition, comment on the feasibility of each option. Business Function Current Value Cost of Inputs $50,000 Production Costs $30,000 Revenue $83,000arrow_forward
- Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,300 units × $29.00) Variable cost (8,300 units x a) Contribution margin Fixed cost Net income Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.) c. If the economy contracts in coming years, Larson and Benson will both…arrow_forwardA sporting goods manufacturer has decided to expand into a related business. Management estimates that to build and staff a facility of the desired size and to attain capacity operations would cost $520 million in present value terms. Alternatively, the company could acquire an existing firm or division with the desired capacity. One such opportunity is a division of another company. The book value of the division’s assets is $350 million and its earnings before interest and tax are presently $60 million. Publicly traded comparable companies are selling in a narrow range around 12 times current earnings. These companies have book value debt-to-asset ratios averaging 40 percent with an average interest rate of 10 percent. a. Using a tax rate of 36 percent, estimate the minimum price the owner of the division should consider for its sale. Note: Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.arrow_forwardThe Robo Division, a decentralized division of GMT Industries, has been approached to submit a bid for a potential project for the RSP Company. Robo Division has been informed by RSP that they will not consider bids over $8,000,000. Robo Division purchases its materials from the Cross Division of GMT Industries. There would be no additional fixed costs for either the Robo or Cross Divisions. Information regarding this project is as follows. Cross Robo Division Division Variable Costs $1,500,000 $4,800,000 Transfer Price 3,700,000 If Robo Division submits a bid for $8,000,000, the amount of contribution margin recognized by the Robo Division and GMT Industries, respectively, is: a. $(500,000) and $(2,000,000). Ob. $3,200,000 and $(500,000). Oc. $(500,000) and $1,700,000. Od. $3,200,000 and $1,700.000.arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning