PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 13PS
Payout policy in perfect capital markets Go back to the first Rational Demiconductor balance sheet one more time. Assume that Rational does not win the lawsuit (see Problem 12) and is left with only $1 million in surplus cash. Nevertheless Rational decides to pay a cash dividend of $2 per share. What must Rational do to finance the $2 dividend if it holds its debt and investment policies constant? What happens to price per share?
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In considering Modigliani & Miller’s (M&M) Propositions I and II in a world with no taxes and no bankruptcy risk, assume Firm A is an all-equity firm with a required return on its assets (Ra) of 10%. Firm B is a levered firm and can borrow in the debt market at 7% (Rd). If M&M’s proposition II holds, what is the cost of equity and the WACC if Firm B is levered to 50% debt: is this capital structure better for Firm B? Show your calculations.
Suppose company A is 100% equity and goes through a leverage recapitalisation operation, i.e., it issues debt and all the proceeds from debt are used to buy back equity. Select all correct answers below (multiple correct answers are possible).
a. In a perfect capital markets world with taxes, the share price increases with the leverage recapitalisation operation.
b. In a perfect capital markets world without taxes, WACC is the same before and after the leverage recapitalisation operation.
c. In a perfect capital markets world without taxes, we can be 100% sure the cost of debt is the same before and after the leverage recapitalisation operation.
d. In a perfect capital markets world without taxes, the cost of equity is the same before and after the leverage recapitalisation operation.
e. In a perfect capital markets world with taxes, the share price decreases with the leverage recapitalisation operation.
Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 51.5% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (wc) = 1 – wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU? Do not round your intermediate calculations.
Risk-free rate, rRF
5.00%
Tax rate, T
25%
Market risk prem, RPM
4.00%
Current wd
0%
Current beta, bU
1.20
Target wd
51.5%
4.78%
3.06%
4.40%
3.63%
3.82%
Chapter 16 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 16 - Dividend payments In 2017, Entergy paid a regular...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 2. Assume...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Company dividend policy Here are several facts...Ch. 16 - Prob. 7PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Information content of dividends Generous dividend...Ch. 16 - Prob. 11PS
Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Respond...Ch. 16 - Prob. 15PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Payout and valuation Look back one last time at...Ch. 16 - Dividend clienteles Mr. Milquetoast admires Warren...Ch. 16 - Prob. 24PSCh. 16 - Payout and taxes Which of the following U.S....Ch. 16 - Prob. 26PSCh. 16 - Prob. 27PSCh. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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