CORPORATE FINANCE- ACCESS >C<
12th Edition
ISBN: 9781307447248
Author: Ross
Publisher: MCG/CREATE
expand_more
expand_more
format_list_bulleted
Question
Chapter 19, Problem 8CQ
Summary Introduction
To determine: The Advantages and Disadvantages of dividend reinvestment plan.
Introduction: A dividend reinvestment plan (DRIP) is a investment procedure in which financial specialists reinvest their cash dividends out the organization through the acquisition of extra stocks on the profit payment date.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Please help solve:
Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains.
Consider the case of Sixty-second Avenue Company:
Sixty-second Avenue Company has forecasted a net income of $4,800,000 for this year. Its common stock currently trades at $22 per share, and the company currently has 720,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them.
As a result, Sixty-second Avenue’s management is considering making a share repurchase transaction in which it would buy back 85,000 shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either…
Indicate whether the following statements are true or false. If the statement is false, explainwhy.a. If a firm repurchases its stock in the open market, the shareholders who tender thestock are subject to capital gains taxes.b. If you own 100 shares in a company’s stock and the company’s stock splits two-forone,you will own 200 shares in the company following the split.c. Some dividend reinvestment plans increase the amount of equity capital available tothe firm.d. The Tax Code encourages companies to pay a large percentage of their net income inthe form of dividends.e. If your company has established a clientele of investors who prefer large dividends,the company is unlikely to adopt a residual dividend policy.f. If a firm follows a residual dividend policy, holding all else constant, its dividendpayout will tend to rise whenever the firm’s investment opportunities improve.
Share repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $7,000,000. There is a large block of stock available at $35 a share.
For the sake of this exercise let us disregard tax implications and effects.
If the firm decides to spend this amount of excess cash on a share repurchase program, how many shares will be repurchased??
What are the benefits of repurchasing shares? How will this affect the capital structure of the company? How can this be interpreted in the marketplace?
Suppose the market price of the shares is $35.75 a share. Why do you think the seller of the large block would agree to see at $35 a share?
Suppose the assumptions of MM are true, then what would happen to the market price of shares once the purchase of the large block at $35 a share is completed? Would it rise above $35.75, remain unchanged or fall?
Would a dividend be better? Please discuss the pros and cons of dividends and share buybacks. Make a…
Chapter 19 Solutions
CORPORATE FINANCE- ACCESS >C<
Ch. 19 - Dividend Policy Irrelevance How is it possible...Ch. 19 - Stock Repurchases What is the impact of a stock...Ch. 19 - Dividend Policy It is sometimes suggested that...Ch. 19 - Dividend Chronology On Tuesday, December 8,...Ch. 19 - Prob. 5CQCh. 19 - Prob. 6CQCh. 19 - Dividends and Stock Price Last month, Central...Ch. 19 - Prob. 8CQCh. 19 - Dividend Policy For initial public offerings of...Ch. 19 - Investment and Dividends The Phew Charitable Trust...
Ch. 19 - Use the following information to answer the next...Ch. 19 - Stock Repurchases How do you think this tax law...Ch. 19 - Dividends and Stock Value The growing perpetuity...Ch. 19 - Bird-in-the-Hand Argument The bird-in-the-hand...Ch. 19 - Dividends and Income Preference The desire for...Ch. 19 - Dividends and Clientele Cap Henderson owns Neotech...Ch. 19 - Prob. 17CQCh. 19 - Prob. 18CQCh. 19 - Prob. 19CQCh. 19 - Prob. 20CQCh. 19 - Prob. 1MCCh. 19 - Jessica believes that the company should use the...Ch. 19 - Prob. 3MCCh. 19 - Another option discussed by Tom, Jessica, and...Ch. 19 - Prob. 5MCCh. 19 - Does the question of whether the company should...
Knowledge Booster
Similar questions
- 6. Stock repurchases Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains. Consider the case of Gadgetron Inc.: Gadgetron Inc. expects to earn $5,300,000 this year. The company currently has 830,000 shares outstanding, and the shares have a per-share market price of $19. Assuming that Gadgetron's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share-if it repurchases 85,000 shares at the current market price-should be Which of these factors are considered an advantage of a stock repurchase? Check all that apply. The firm might pay too high a price for the repurchased stock. Repurchases can be used to produce large-scale changes in capital structure. When a firm distributes cash by…arrow_forwardOPENER-IN-REVIEW In the chapter opener, you learned that with Brookdale Senior Living's stock price trading around $12.35 per share, one of the firm's investors proposed an idea that might net the firm's shareholders $21 per share in cash. Suppose that Brookdale acted upon the suggestion of Land and Buildings and that as a result Brookdale was able to distribute $21 per share in cash to its investors. Suppose that after selling its real estate assets and paying out cash to shareholders, Brookdale's shares were worth $5 per share. Are Brookdale's investors better or worse off? Specifically, calculate the percentage change in the wealth of share- holders (including the cash they received and the change in the value of their stock) that would hypothetically occur if Brookdale acted according to this plan. Now suppose that Brookdale had 185.45 million shares outstanding. What is the total dollar value of wealth created (or destroyed) by the restructuring pro- posed by Land and Buildings?arrow_forwardFirms that are quoted on the stock market can raise money by issuing shares. These are sold on the ‘primary stock market’. People who own the shares receive a ‘dividend’ on them, normally paid six-monthly. The amount varies with the profitability of the company.People or institutions that buy these shares, however, may not wish to hold on to them for ever. This is where the ‘secondary stock market’ comes in. It is where existing shares are bought and sold. There are stock markets, primary and secondary, in all the major countries of the world.There are 2292 companies (as of October 2016) whose shares and other securities are listed on the London Stock Exchange and trading in them takes place each weekday. The prices of shares depend on demand and supply. For example, if the demand for Tesco shares at any one time exceeds the supply on offer, the price will rise until demand and supply are equal. Share prices fluctuate throughout the trading day and sometimes price changes can be…arrow_forward
- Consider company Macrosoft, whose current stock price is 542. The board of directors of Macrosoft has decided to engage a spin-off. Each shareholder of Macrosoft will receive 3.50232 shares of Coco Colo, whose stock price is 8.34, for each share of Macrosoft owned. Consider an investor who currently owns 152 shares of Macrosoft. What is the amount of cash that this investor will receive after that spin-off? A) 4436.88 B) 2.941 C) 4439.821 D) 636.781arrow_forwardResidual dividend policy As president of Young's of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company's dividend policy. In fact, the stockholder has asked you to estimate the amount of the dividend that you are likely to pay next year. You ions have not yet collected all the information about the expected dividend payment, but you do know the following: (1) The company follows a residual dividend policy. (2) The total capital budget for next year is likely to be one capital expenditure amounts are $2 million, $3 million, and $4 million. (3) The forecasted level of potential retained earnings next year is $2 million. (4) The target or optimal capital structure is a debt ratio of 35%. You have decided to respond by sending the stockholder the best information available to you. three amounts, depending on the results of capital budgeting studies that are currently under way. The a. Compute the amount of…arrow_forward1. 2. 3. On February 1, you bought 100 shares of stock in the Francesca Corporation for $34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a share. Compute your HPR and HPY on this Francesca stock investment. Firms raise capital from investors by issuing shares in the primary markets. Does this imply corporate financial managers can ignore trading of previously issued shares in the secondary market? 7. A stockbroker calls you and suggests that you invest in the Lauren Computer Company. After analyzing the firm's annual report and other material, you believe that the distribu- tion of expected rates of return is as follows: LAUREN COMPUTER CO. Possible Rate of Return -0.60 -0.30 -0.10 0.20 0.40 0.80 Probability 0.05 0.20 0.10 0.30 0.20 0.15 Compute the expected return [E(R;)] on Lauren Computer stock.arrow_forward
- The cost of preferred stock Firms that carry preferred stock in their capital structure want to not only distribute dividends to common stockholders but also maintain credibility in the capital markets so that they can raise additional funds in the future and avoid potential corporate raids from preferred stockholders. Consider the case of Blue Panda Ice Cream Company: Blue Panda has preferred stock that pays a dividend of $9.00 per share and sells for $100 per share. It is considering issuing new shares of preferred stock. These new shares incur an underwriting (or flotation) cost of 1.70%. How much will Blue Panda pay to the underwriter on a per-share basis? Pick the correct choice. $1.44 $88.47 $1.70 $98.30 After it pays its underwriter, how much will Blue Panda receive from each share of preferred stock that it issues? Pick the correct choice. $98.30 $1.44 $1.87 $88.47 $1.70 Based on this…arrow_forwardYour company is finally ready to sell its shares to the public. The manager of your company decided to sell 20% of total shares to an investment bank. In which market this transaction will take place? Select one: a.Secondary market b.Bonds market c.Primary market d.Stock exchange market e.None of the abovearrow_forwardStockholder Payout Rations Super Duper Corporation had a string of successful years. Super Dupers executives wish to examine how its stockholders have been compensated for their contributed capital. The following information pertains to Super Duper Corporation: Required: Calculate the dividend yield, dividend payout, and total payout.arrow_forward
- Assume that company A wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of $21 per share and no debt. A has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $50 million on a permanent basis and they will use the borrowed funds to repurchase outstanding shares. If shareholders are perfectly rational and informed, what will the repurchase price per share be (keep two decimal places and assume that the new borrowing will not have any negative effects)?arrow_forwardStock Repurchase A firm has 20 million shares outstanding with a market price of $20 per share. The firm has $25 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm's value of operations after the repurchase? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. million How many shares will remain after the repurchase? Round your answer to the nearest whole number. sharesarrow_forwardStock Valuation methods: Free cash now model Suppose you are evaluating SolarHeat Co., a renewable energy startup that does not pay dividends, and you want to determine the value of their shares using a free cash flow model. To do this, you analyze their financial statements for several things: (1) present value of free cash flows, (2) sabilities, and (3) number of outstanding shares. After some analysis, you determine that the present value of SolarHeat Co/s free cash flows, labilities, and number of outstanding shares are $140 million, $35 million, and 30 million, respectively, and that the cash flows will show no growth in the future. Using this information, and the free cash flow model, SolarHeat Co's value per share ist $3.50 $3.82 4.10 Which of the following are limitations to the free cash flows model? Check all that apply It can result in inaccurate valuations when the firm's forecasted earnings are incorrectly estimated. It can result in inaccurate valuations when the firm's…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning