EBK PRINCIPLES OF MANAGERIAL FINANCE
14th Edition
ISBN: 8220100666759
Author: ZUTTER
Publisher: PEARSON
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Chapter 7, Problem 7.1STP
a.
Summary Introduction
To determine: The value of the common stock if the growth rate is 0.00% to infinity.
b.
Summary Introduction
To determine: The value of the common stock if the growth rate is 5.00% to infinity.
b.
Summary Introduction
To determine: The stock price if expected to grow at an annual rate of 5% for each of the next 3 years, followed by a constant annual growth rate of 4% in year 4 to infinity.
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(Learning Objective 2: Describe the effect of a stock issuance on paid-in capital)Saltwell Industries received $11,500,000 for the issuance of its stock on May 14. The par valueof the Saltwell stock was only $11,500. Was the excess amount of $11,488,500 a profit to Saltwell? If not, what was it?Suppose the par value of the Saltwell stock had been $2 per share, $4 per share, or $7 pershare. Would a change in the par value of the company’s stock affect Saltwell’s total paid-incapital? Give the reason for your answer.
Question content area top
Part 1
(Common stock valuation) Assume the following:
•
the investor's required rate of return is
14.5
percent,
•
the expected level of earnings at the end of this year
(E1)
is
$6,
•
the retention ratio is
40
percent,
•
the return on equity
(ROE)
is
14
percent (that is, it can earn
14
percent on reinvested earnings), and
•
similar shares of stock sell at multiples of
6.742
times earnings per share.
Questions:
a. Determine the expected growth rate for dividends.
b. Determine the price earnings ratio
(P/E1).
c. What is the stock price using the P/E ratio valuation method?
d. What is the stock price using the dividend discount model?
e. What would happen to the P/E ratio
(P/E1)
and stock price if the company increased its retention rate to
80
percent (holding all else constant)? What would happen to the P/E ratio
(P/E1)
and stock price if the company paid out all its earnings in the form of dividends?…
Q-1.
(a)
The following table gives Foust Company’s earnings per share (EPS) for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/20) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/20) is 55% of the 2019 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.)
Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. Its capital structure, considered to be optimal, is as follows:Debt $111,000,000Preferred Stock $4,000,000Common equity $155,000,000Total liabilities and equity $270,000,000i. If the company was to issue new debt, what would be a reasonable estimate of the interest rate on…
Chapter 7 Solutions
EBK PRINCIPLES OF MANAGERIAL FINANCE
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.2 - Prob. 7.8RQCh. 7.2 - Prob. 7.9RQCh. 7.2 - Prob. 7.10RQ
Ch. 7.2 - Prob. 7.11RQCh. 7.3 - Prob. 1FOECh. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.13RQCh. 7.3 - Describe, compare, and contrast the following...Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.17RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 1ORCh. 7 - Prob. 7.1STPCh. 7 - Prob. 7.2STPCh. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Prob. 7.2PCh. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Prob. 7.10PCh. 7 - Prob. 7.11PCh. 7 - Prob. 7.12PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.14PCh. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Prob. 7.17PCh. 7 - Prob. 7.19PCh. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Prob. 7.24P
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- ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 out of annual earnings per share of 2.25. Currently, Rubenstein Bros.' stock is selling for 12.50 per share. Adhering to the company's target capital structure, the firm has 10 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) b. What is the stock's required return? c. If the firm changed its dividend policy and paid an annual dividend of 1.50 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firms new expected long-run growth rate and required return? d. Suppose instead that the firm has decided to proceed with its original plan of dis bursing 0.75 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50. In other words, for every 12.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalist ion? (Hint. Remember that market capitalization = P0 number of shares outstanding.) e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the companys earnings per share be diluted?arrow_forwardProblem 10-86A Stock Dividends and Stock Splits Lance Products balance sheet includes total assets of $587,000 and the following equity account balances at December 31, 2019: Lances common stock is selling for $12 per share on December 31, 2019. Required: How much would Lance Products have reported for total assets and retained earnings on December 31, 2019, if the firm had declared and paid a $15,000 cash dividend on December 31, 2019? Prepare the journal entry for this cash dividend. How much would Lance have reported for total assets and retained earnings on December 31, 2019, if the firm had issued a 15% stock dividend on December 31, 2019? Prepare the journal entry for this stock dividend. CONCEPTUAL CONNECTION How much would Lance have reported for total assets and retained earnings on December 31, 2019, if the firm had effected a 2-for-l stock split on December 31, 2019? Is a journal entry needed to record the stock split? Why or why not?arrow_forwardQ-1. (a) The following table gives Foust Company’s earnings per share (EPS) for the last 10 years. The common stock, 7.8 million shares outstanding, is now (1/1/20) selling for $65.00 per share. The expected dividend at the end of the current year (12/31/20) is 55% of the 2019 EPS. Because investors expect past trends to continue, g may be based on the historical earnings growth rate. (Note that 9 years of growth are reflected in the 10 years of data.) Foust has 25-year non-callable bonds outstanding with a face value of $1,000, an 12% annual coupon, and a market price of $1,320. Foust can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. Its capital structure, considered to be optimal, is as follows: Debt $111,000,000Preferred Stock $4,000,000Common equity $155,000,000Total liabilities and equity $270,000,000 i. If the company was to issue new debt, what would be a reasonable estimate of the interest rate…arrow_forward
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