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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

a. How would a firm′s decision to pay out a higher percentage of its earnings as dividends affect each of the following?

  1. 1. The value of its long-term warrants
  2. 2. The likelihood that its convertible bonds will be converted
  3. 3. The likelihood that its warrants will be exercised

b. If you owned the warrants or convertibles of a company, would you be pleased or displeased if it raised its payout rate from 20% to 80%? Why?

a.

Summary Introduction

To Discuss: The ways in which a firm's assessment to remunerate an increased proportion of its earning as dividend affect the worth of its long-term warrants, the possibility that the convertible bonds are converted and the possibility that the warrants are exercised.

Introduction: Convertibles are securities, typically bonds or preferred stocks, that can be changed over into common stock. Convertibles are frequently connected with convertible bonds, which permit investors to change over their creditor position to that of a equity holder at a agreed upon cost.

Explanation

The ways in which a firm's assessment to remunerate an increased proportion of its earning as dividend affect the worth of its long-term warrants is as follows:

The worth of a warrant is initially based on the expected growth of the underlying price of the stock. This growth, thus, depends significantly on the plowback of profit, the greater the dividend payout, the lesser the retention rate, consequently the slower the growth rate. Along these lines, different things held steady, the greater the firm's dividend payout strategy, the lesser the estimation of the warrant. This impact is more articulated for long term when compared to the short-term warrants.

The ways in which a firm's assessment to remunerate an increased proportion of its earning as dividend affect the possibility that the convertible bonds are converted is as follows:

The similar general contentions as in the previous part hold for convertibles...

b.

Summary Introduction

To Discuss: Whether it would be pleasing or displeasing if payout is raised from 20% to 80%.

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